A quick look at what has happened to Japan’s International Investment Position (NIIP) is instructive, this being the net difference what Japan investors have invested abroad, and foreign investors have invested in Japan) over the past few years as the BoJ stage managed its ultra-easy policy exit, which has seen the JPY fall 12% and 7% respectively in the past two years, and a further 10% this year. In 2023 Japan’s NIIP grew $366.5 Bln to $3.36 Trln (or JPY 471.3 Trln), equating to an increase from 76.6% of GDP at end 2022 to a record 84.3% of GDP at end 2023. Of particular note is that FX moves boosted the value of foreign investments by $615 Bln (JPY 86.1 Trln), though this was offset by mark- to-market changes of around $223 Bln. The point very simply being that Japan’s investors are sitting on a lot of unrealized profits.


Given that 10-yr JGB yields have already touched a 13-yr high of 1.1%, and that BoJ QT is likely to exercise some further upward pressure on yields, the temptation to repatriate and realize some of those profits will grow, especially if the combination of tighter BoJ policy and a gradual reduction in US and other G7 rates alters perspectives on future G7 rate differentials, which are more favourable for the JPY. At that type of transition point, volatility will likely rise, not only due to divergent market views on the pace of convergence, but also because it will take a considerable period of time for the JGB market to re-establish many of the market mechanisms for pricing that have been largely abandoned due to the BoJ’s ultra-easy policy.


Marc Ostwald E: marc.ostwald@admisi.com T: +44(0) 20 7716 8534


19 | ADMISI - The Ghost In The Machine | Q2 Edition 2024


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