Japanese Investors Favor Bonds Over Stocks Amid Yen Weakness

Japanese investors sold overseas stocks for the third straight month in July, driven by profit-taking and high valuations. However, the weakening yen led to a significant increase in high-yield overseas bond purchases, with a net inflow of 3.63 trillion yen. Trust accounts and other institutional investors also reduced their foreign stock holdings and increased their long-term bond holdings.

Japanese investors have continued their trend of selling overseas stocks and buying high-yield bonds, marking the third consecutive month of net foreign equity sales and a significant increase in bond purchases. According to data from Japan's Ministry of Finance, Japanese investors withdrew approximately 536.4 billion yen ($3.64 billion) from foreign equities in July [1]. This follows a net sale of 1.99 trillion yen in the previous month. Meanwhile, Japanese investors snapped up 3.63 trillion yen worth of foreign bonds in July, indicating a third monthly net purchase [1].

The yen's depreciation, which dipped approximately 4.5% against the dollar last month, has been a driving factor in this shift. The weakened yen boosted returns on foreign bonds, making them more attractive to Japanese investors [1]. Trust accounts and other institutional investors also reduced their foreign stock holdings and increased their long-term bond holdings. In July, trust accounts sold a net 1.52 trillion yen worth of foreign equities and bought a net 419.6 billion yen worth of long-term bonds [1].

The Bank of Japan's gradual interest rate hikes have also contributed to the trend. Japanese government bond yields have been trending higher, with the 10-year JGB yield reaching 1.605% in late July, its highest level since October 2008 [2]. Higher yields on bonds and other investments have made them more appealing to Japanese investors.

Mitsubishi UFJ Financial Group, one of Japan's largest financial institutions, reported a drop in first-quarter net profit but maintained its fiscal-year profit target. The company's first-quarter net profit fell 1.8% to 546.07 billion yen, but excluding one-off gains, the company's net profit increased from a year ago [2]. The company continues to target a 7.4% rise in net profit for the fiscal year that began in April [2].

In summary, Japanese investors have been selling foreign stocks and buying high-yield overseas bonds, driven by profit-taking, high valuations, and the weakening yen. This trend is likely to continue as long as the yen remains weak and bond yields remain attractive.

References:
[1] https://www.reuters.com/markets/europe/japanese-investors-dump-foreign-stocks-pile-into-bonds-july-yen-weakens-2025-08-08/
[2] https://www.wsj.com/business/earnings/mitsubishi-ufj-posts-lower-net-profit-but-backs-guidance-dab02c60