August 21, 2014 5:30 am JST

Japan Post's asset buying keeping yen weak amid geopolitical risks

TOKYO -- Even as the conflicts in Iraq and Ukraine drive investors to put money in safe-haven assets, the Japanese currency is staying relatively weak, weighed down by yen-selling by the banking and insurance units of government-backed Japan Post Group.

     The yen briefly dipped to 103.34 yen to the dollar on the Tokyo market Wednesday, its softest showing in four and a half months. The decline could not be attributed to any particular development, leading a foreign bank dealer to conclude that "the invisible hands" were at work, referring to volume selling that happens whenever the currency strengthens.

     On Aug. 8, when U.S. President Barack Obama approved airstrikes in Iraq, the yen stiffened to around 101 yen to the dollar, but was soon weighed down by large-lot sell orders. Japan Post Insurance sold the yen to purchase foreign bonds, according to a market observer.

     Indeed, Japan Post's insurance unit has been boosting investments in foreign assets, as has its banking unit. The balance of Japan Post Bank's foreign-currency-denominated assets -- the bulk of which are bondholdings -- rose 6.8 trillion yen ($65.39 billion) over a year to some 25 trillion yen as of the end of June. Japan Post Insurance's holdings of foreign bonds and stocks, meanwhile, increased 700 billion yen to around 1.6 trillion yen.

     "If domestic interest rates remain low, Japan Post Bank will continue to step up investment in foreign bonds," said a Japan Post official. And Japan Post Insurance may invest an additional 300 billion yen or so in foreign bonds by the end of this fiscal year.

     The market is also wary of another round of possible yen-selling. As early as September, the Government Pension Investment Fund will finalize its new asset allocation plan with a heavier weighting in risk assets. Other public funds are weighing similar steps.

     As public pension funds rebalance their portfolios, Masahiro Nishikawa at Goldman Sachs Japan expects that their heavier investment in foreign securities could result in yen-selling pressure of 11 trillion yen or more.

     Yunosuke Ikeda at Nomura Securities has been fielding more inquiries lately from foreign investors eager to find out about the potential impact of public pension reforms on the foreign exchange market.

     The U.S. Federal Reserve is moving to wind down quantitative easing as early as October, which would draw all eyes to a potential interest rate hike in the U.S.

     "If funds spring at the GPIF's investment in foreign assets to drive the yen lower, the Japanese currency could soften to as low as 110 yen per dollar by the end of this year," Ikeda said.