Japanese Yen: NISA-driven outflows weigh on currency – MUFG

MUFG’s Derek Halpenny analyses September Ministry of Finance (MoF) securities data, noting strong foreign purchases of Japanese bonds after the Bank of Japan (BoJ) rate hike, suggesting improved JGB confidence. He highlights record Japan Investment Trust flows into foreign equities via NISA (Nippon Individual Savings Account), implying annualised outflows near JPY 16trn, which he sees as an increasingly negative factor for the Japanese Yen unless policy shifts to include JGBs in NISA.

Record NISA flows pressure Japanese Yen

"Yesterday, the MoF released the International Transactions in Securities data for September that reveals the Japanese investor-type and foreign investor cross-border flows and two stand-out observations are worth noting."

"Firstly, September was a month of turmoil in global bond markets and that was evident in the selling of foreign bonds by Japanese investors. However, interestingly foreign investors did not show the same aversion to fixed income and there was a notable JPY 3,091bn worth of purchases of Japanese bonds. September was also a month in which the BoJ raised rates again and that flow could be indicative of improved confidence in JGBs after three consecutive months of selling through to August."

"Secondly, the Japan Investment Trust flow was telling with foreign equity purchases totalling JPY 1,360bn in September. The buying has picked up and the 3mth sum of foreign equity purchases totalled JPY 3,949bn, a new record over a 3mth period. This Investment Trust flow captures households buying of foreign securities via NISA accounts and it remains clear that the expanded NISA limits adopted in January 2024 continues to have a notable impact."

"Annualising this 3mth flow implies an outflow of close to JPY 16trn (USD 100bn) and is an increasing negative yen factor."

"Providing tax-free opportunities to hold JGBs could well have an impact on the flows to foreign equity markets that is so evident today and given the scale of foreign equity purchases currently would be viewed as a clear yen positive."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)