Since 2012 and the start of Abenomics, foreign inflows in Japanese government bonds (JGBs) have basically matched Japanese purchases of foreign bonds (mostly corporate bonds, and some CLOs)
Why? The mechanics of modern currency hedging.
cfr.org/blog/puzzle-ja…
Why? The mechanics of modern currency hedging.
cfr.org/blog/puzzle-ja…
Japanese institutional investors (according to the BoJ) hold around $1 trillion (a bit more now) of foreign assets on a hedged basis, and the banks hedge their dollar lending as well --
2/x)
2/x)
a hedged portfolio is often based on a swap -- the Japanese investors swaps yen for dollars, and then invests in US dollar credit (or in euros now, as it is cheaper to hedge euros now).
the counterparty to the swap gets yen, and typically buys short-term JGBS
3/x
the counterparty to the swap gets yen, and typically buys short-term JGBS
3/x
The Japanese institutional investors are effectively acting as dollar-based intermediaries, borrowing dollars to lend dollars (or more often, to buy CLOs or corporate securities).
4/x
4/x
This ends up showing up in the BoP a strange way.
Foreigners are buying large quantities of safe Japanese bonds (on a hedged basis), and Japanese investors are buying large amounts of risky bonds (also mostly hedged).
Modern financial intermediation!
5/5
Foreigners are buying large quantities of safe Japanese bonds (on a hedged basis), and Japanese investors are buying large amounts of risky bonds (also mostly hedged).
Modern financial intermediation!
5/5
