BOJ Hike Seen as Key to Sustained Yen Strength

Goldman Sachs economists say Japanese investors are continuing to direct capital toward foreign markets despite Tokyo's stated ambitions to redirect investment flows domestically.

The bank points to a Ministry of Finance report showing continued net purchases of foreign bonds at a sizable pace in July, evidence that any policy driven shift toward repatriation has yet to materially change investor behavior.

Goldman said it may take time before such a policy shift becomes visible in the flow data, and stopped short of ruling out a change altogether. However, the bank said its existing skepticism toward the likelihood of large scale unhedged repatriation flows, based on the view that better return prospects abroad continue to outweigh the pull of domestic redirection efforts, still looks fair given the latest data.

The note adds a capital flows dimension to a broader debate that has played out across recent commentary on the yen, much of which has centred on the limits of intervention as a durable support mechanism. Goldman's note points to a related conclusion from a different angle: if Japanese capital is not coming home despite policy encouragement to do so, then repatriation is unlikely to be the channel through which sustained yen strength eventually arrives.

Instead, Goldman ties the more credible path to yen strength to monetary policy itself, saying a Bank of Japan interest rate hike next month would help deliver longer term support for the currency. This view is consistent with the fundamentals based argument already running through this week's coverage, that genuine and lasting yen strength is more likely to come from a narrowing of rate differentials between Japan and the United States than from either intervention or a shift in where Japanese investors choose to park their capital.

Taken together, the note reinforces a consistent thread across recent research, that market participants across several houses are converging on the view that the BOJ's own policy path, rather than intervention or capital flow redirection, is the more reliable determinant of where the yen goes from here.