Japan’s Ministry of Finance cross-border data shows Japanese investors were major net sellers of foreign bonds in March. The activity was linked to the wider bond market sell-off that month.
Japanese investors sold JPY 3,757bn of foreign bonds in March, after selling JPY 3,422bn in February. This totals JPY 7,179bn over two months, described as a record net sale for the period.
Drivers Of The Record Foreign Bond Selling
The selling was largely attributed to banks and life insurers. Factors cited include fiscal year-end positioning and a higher-than-expected USD/JPY level alongside a strong rally, which supported profit-taking.
Attention now turns to whether foreign bond buying returns as the new fiscal year begins. Future flow data will be used to judge if demand shifts towards Japan’s domestic bond market, including JGBs, although there was stated to be limited evidence of a move towards JGBs at the time.
We have seen that Japanese investors were huge sellers of foreign bonds in February and March, unloading a record amount to close out the fiscal year. This selling was likely driven by the need to take profits on a very high USD/JPY and rebalance portfolios. The critical question now, at the start of the new fiscal year, is whether this money will return to foreign markets or stay home.
This situation is different from past years because domestic options are now more attractive. The Bank of Japan officially ended its negative interest rate policy last month, and with core inflation holding stubbornly above 2%, yields on Japanese Government Bonds (JGBs) are rising. Current 10-year JGB yields are hovering near 1%, a level unseen for over a decade, providing a viable alternative to foreign bonds for the first time in years.
What To Watch In Yen Rates And Options
For derivative traders, this creates a major potential inflection point for the yen. If Japanese funds decide to buy JGBs instead of US Treasuries, it would mean sustained demand for JPY and could pressure USD/JPY lower. The weekly flow data from the Ministry of Finance will be the most important indicator to watch for signs of this shift.
This creates an opportunity in the options market, as uncertainty about these massive flows is rising. Implied volatility for USD/JPY has been creeping up, suggesting the market is pricing in a larger-than-usual move in the coming weeks. Traders could consider strategies that benefit from a significant directional shift, as the period of steady yen weakness may be challenged.
Looking back at this time in 2025, we saw a similar pattern of heavy year-end selling, which was followed by hesitant buying as the new fiscal year began. However, the key difference today is the credible policy shift from the Bank of Japan, making domestic recycling of funds a much stronger possibility. The current USD/JPY spot rate, which remains elevated above 158, also makes unhedged foreign investing look expensive and risky.
