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Japanese Investors Switch to Selling Foreign Bonds After Month-Long Buying Spree

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Japanese Investors Switch to Selling Foreign Bonds After Month-Long Buying Spree

Japanese investors turned net sellers of overseas debt last week, snapping a month-long buying streak as market volatility fueled speculation of a shift in the Bank of Japan's quantitative tightening timeline.

Domestic investors sold a net 184.8 billion yen of foreign bonds in the week ended May 30. This reversed four consecutive weeks of net purchases, including a 12.9 billion yen purchase the previous week, according to data from Japan's Ministry of Finance on Thursday.

The shift comes as volatile bond markets trigger speculation that the BOJ may pause the reduction of its government bond holdings in fiscal 2027. This potential delay would alter the quantitative tightening path the central bank initiated in 2024.

At its upcoming policy meeting on June 15-16, the BOJ is expected to keep its current bond-tapering plan through March 2027, while introducing a new framework for the following fiscal year.

According to Reuters, policymakers are leaning toward a tapering pause due to market jitters stemming from the conflict in the Middle East.

"Markets remain volatile, so there's no need to rush," a source familiar with the BOJ's deliberations told Reuters, noting that many market participants prefer keeping the current pace of bond purchases.

The policy outlook is further complicated by the high probability of an interest rate hike this month.

Bank of Japan Governor Kazuo Ueda on Wednesday signaled that a rate hike remains on the table for the June meeting if escalating Middle East tensions drive up inflation risks.

"Even if the situation remains unclear, should it be judged that upside risks to prices outweigh downside risks to economic activity, it will be necessary to thoroughly discuss the pros and cons of raising the policy interest rate," Ueda said.

Money markets are pricing in roughly an 85% chance of a quarter-point rate hike as policymakers seek to contain inflationary pressures and support the Japanese yen.

The currency has continued to weaken toward the 160-per-dollar level despite repeated intervention efforts by authorities.

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