By Gaurav Dogra and Brigid Riley
(Reuters) - Japanese investment data on Friday confirmed what the sliding yen had been pointing to all week, that after a scary burst of turmoil global investors were back to betting on the Bank of Japan going slow on rate rises and on the yen staying cheap.
Japanese investors ploughed the most money into long-term overseas bonds in 12 weeks in the week to Aug. 10 and also bought a lot of short-term foreign debt, Friday's data from the Ministry of Finance showed.
The yen has also been sliding steadily this week, ending its sharp rally in early August after the Bank of Japan's surprisingly hawkishness on further rate rises combined with U.S. recession worries to spark an aggressive unwinding of yen-financed carrytrades.
The flows and the yen's slide have sparked chatter that carry trades are slowly returning, although not everyone is certain.
"We can kind of say that yen short covering has been already done and now the positioning is light,"said Yusuke Miyairi, strategist for G10 currencies at Nomura in London.
"But then is the carry trade back on? I'm not sure. Yes, dollar-yen is going closer to 150, but the volatility of the FX market remains relatively high."
The yen was near 150 on Friday, far from 38-year lows struck last month but equally well below the high of 141.675 yen hit on Aug.5.
The sharp swings have kept however volatility elevated, and such volatility usually derails carry trades.
But betting on yen weakness has been easier for investors after BOJ Deputy Governor Shinichi Uchida dampened the hawkishness. Positioning has also been favourable after data late last week showing leveraged funds' positionson the Japanese yen shrank to the smallest net short stance since February 2023.
A hawkish BOJ would have meant higher yields on Japanese government bonds, and Japanese money coming home, which would have affected the "construct of a weakening yen" essential for carry trades, said Rong Ren Goh, a portfolio manager in the fixed income team at Eastspring Investments.
"With the BOJ assuring that they will not hike if markets turn unstable, it’s a 'put' on the overseas investments of domestic investors," he said.
FLOWS
Japanese investors bought 1.54 trillion yen worth of long-term overseas bonds last week, marking the largest weekly net purchase in 12 weeks, and also acquired short-term instruments totalling a net 453.5 billion yen.
Japanese investors, however, shed foreign shares worth a net 328.1 billion yen after three weeks of net purchases in a row.
Nomura's Miyairi cautions against reading too much into the flows data about yen positioning, as some Japanese investors, such as banks, often use interbank repurchase transactions, or repos, to finance their purchases of bonds.
Overseas investors also snapped up about $3.5 billion in Japanese shares last week, reversing three consecutive weeks of net selling during which the Nikkei share average saw its biggest one-day plunge since 1987. The Nikkei has surged over 20% since.
Foreigners also reversed an eight-week Japan bond selling trend last week, becoming net buyers. They acquired a net 1.44 trillion yen in long-term bonds, the largest amount since May 11, and a net 561.8 billion yen in short-term securities.
That kind of "bargain hunting," at least on a dollar term, may continue with the yen having bottomed out and stablizing, said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.
"The underperformance of Japanese equities has been a good chance for foreign investors to buy."
($1 = 148.9000 yen)