The largest receiver of U.S. debt - Japan

On November 9, data released by Japan's Ministry of Finance showed that Japanese funds bought a net 3.31 trillion yen (about $22 billion) of U.S. bonds in September, the highest in six months. With the exception of France, Japanese funds have sold bonds in most of the sovereign debt markets tracked by Japan's Ministry of Finance.

Analysts believe that the latest data suggests that the large yield gap between Japan and the United States is still attracting Japanese investors to buy U.S. bonds. This year, Japanese investors have been net buyers of US Treasuries every month except April and July, which has kept the yen under pressure.

The U.S. 10-year Treasury yield climbed 46 basis points to settle at 4.57% in September, while the Japanese 10-year yield rose 12.5 basis points to 0.765% over the same period. In recent sessions, US Treasury yields have fallen sharply, unchanged from end-September levels, while Japanese government bond yields have risen, but there is still a gap of more than 3.5 percentage points between the two.

Despite constant warnings from Japanese government officials that they will intervene when the exchange rate is excessively volatile, the spread between U.S.-Japan yields has kept the yen tumbling. On 31 October, the JPY briefly fell to a one-year low of 151.72. As of press time, the Japanese yen is still in historical position at 150.89.

Tsuyoshi Ueno, senior economist at the NLI Institute in Tokyo, said that US Treasury yields rose sharply in September, reaching a level that is attractive to Japanese investors:

Because there is growing certainty that the United States will keep interest rates high for longer. Although the yen is likely to appreciate after Japan exits the YCC in the future, US Treasury yields provide a considerable cushion against the yen's appreciation.

BofA has previously noted that Japanese policymakers will have to use foreign exchange intervention and additional bond purchases to ease the weakness of the yen and JGBs until US interest rate volatility abates, while shorting JGBs and the yen will continue to be a trading method for investing in Japanese markets for the remainder of 2023.

However, the Bank of Japan's intervention alone will not be able to sustain the yen's decline, and whether the yen can stop falling will depend mainly on the Fed's monetary policy shift, which will pull the dollar lower and the yen higher. However, the U.S. economy continues to exceed expectations and the uncertainty of the Palestinian-Israeli conflict has put great pressure on the yen to depreciate.

The "tumbling" yen has already posed a potential risk to the Bank of Japan (BOJ) after media reported that many BOJ policymakers believe that the timing of the exit from YCC could be around the spring of next year, when the question of whether annual wage negotiations will lead to significant wage increases has become clear.

The BOJ's pivot as the "last samurai" of global central banks could shock global markets with a massive return of Japanese funds, and even the slightest sign of the BOJ's exit could trigger a bond sell-off and increase the cost of financing Japan's huge debt.

As a result, the BoJ still has a lot of hurdles to clear before exiting, which means that the BoJ doesn't want the market to get too excited about the opportunity for an early exit.