Japanese investors offload foreign bonds for second week as inflation bites

Japanese investors continued to reduce their holdings of overseas bonds for a second consecutive week in the period through August 29, according to data from the Ministry of Finance. The trend underscores a broader retreat from foreign debt as persistent inflation and expectations of elevated interest rates unsettle global bond markets.

Net sales of foreign long-term bonds reached 824 billion yen ($5.20 billion) during the week. Sales of short-term foreign bills were comparatively modest at 9.7 billion yen, the lowest level in seven weeks.

The sustained outflows signal that Japan is becoming a less dependable source of demand for global debt. Higher domestic yields and the rising cost of currency hedging have diminished the attractiveness of overseas bonds for Japanese investors.

This shift could place additional upward pressure on government bond markets worldwide, as investors seek higher compensation for holding debt amid stubborn inflation and large public borrowing requirements.

Global bond yields recently climbed to multi-decade highs after tensions in the Middle East pushed energy prices up, reigniting inflation concerns. Data released last week showed U.S. annual inflation remained above the Federal Reserve's 2% target for the 65th consecutive month in July.

Fed Chair Kevin Warsh indicated last week that the central bank would "have work to do" if policymakers were not confident that underlying inflation was returning to its target.

In equities, Japanese investors made a net purchase of 35.8 billion yen in overseas stocks, their third weekly net buying in four weeks. Meanwhile, foreign investors bought a net 509.1 billion yen of Japanese long-term bonds for a second straight week and added 16.6 billion yen in short-term bills after two weeks of selling. Foreigners also made a modest net purchase of 35.8 billion yen in Japanese stocks, reversing the previous week's net sales of about 763.4 billion yen.