Forex Flash: JPY weakness triggers outbound FDI – UBS

According to Research Analyst Gareth Berry at UBS, “The three-month old rally of the USD/JPY has been largely driven by non-Japanese investors – mostly from within the hedge fund community. That does not mean Japanese participants have been absent entirely however. In fact, flows of a domestic origin have changed in ways that are even more surprising.”

Much attention has focused on the fact that Japan's current account surplus (which endured almost interrupted for decades) has suddenly flipped into deficit territory. However, the yen outflows involved are still quite modest. On the portfolio side, the weakening yen has not triggered a surge in outflows. Rather, accelerated repatriation by Japanese investors led to net selling in January. Again, the sums involved are quite modest however.

What is particularly noteworthy though is that outbound foreign direct investment (FDI) has increased significantly since the yen began its descent in November. In looking at the data, we see FDI is now the dominant channel through which Japan-based investors exert downward pressure on the yen. This is not to forget that a number of high profile M&A deals (already announced but not yet concluded) do not yet appear in the official data as well.