Analysts expect the Yen to strengthen against the US Dollar, but Japanese investors’ continued overseas buying challenges the pace of recovery.

Japanese investors are still buying foreign assets heavily, testing Goldman Sachs’ expectation that a shift in domestic policy will help the Yen recover against the US Dollar over the next year.

Goldman’s latest forecasts put USD/JPY at 158 in three months, around January 2027, and 150 in 12 months, around October 2027.

The pair ended Friday near 158.33, leaving its near-term projection close to the market while the longer forecast requires a meaningful Yen appreciation.

An 8 October study of Japanese portfolio flows shows why that recovery may take time: investors with unhedged overseas holdings have yet to change direction decisively, even as banks sell foreign bonds.

Goldman’s Karen Reichgott Fishman and colleagues say: “We recently turned structurally bullish Yen as the domestic policies that have weighed on the currency for much of the past 10-15 years appear to be shifting in a more supportive direction. The BoJ has seemingly shifted to a faster pace of hikes and, most importantly, there appears to be a focus within the government on encouraging some reallocation by domestic investors back towards domestic assets.”

The latest evidence tests the shift behind Goldman’s September reduction in its 12-month Dollar-Yen forecast from 165 to 150.

Higher Japanese rates can improve the return available at home, but a stronger domestic investment proposition still has to persuade savers to change what they buy.

Overseas equity buying remains strong

The Goldman analysts say: “We have been of the view that any shift in flows would likely be a slower-moving process, and so far that looks true among mostly unhedged investors.”

Their reading of the Finance Ministry’s September securities transactions release shows investment trusts, including retail investors and NISA savings-account flows, buying a net $8.7 billion of foreign equities, slightly more than in August.

NISA is Japan’s tax-advantaged investment-account system.

MUFG’s 9 October assessment reinforces that concern over a longer window.

Derek Halpenny, MUFG’s head of research for global markets EMEA and international securities, says: “The buying has picked up and the 3mth sum of foreign equity purchases totalled JPY 3,949bn, a new record over a 3mth period.”

Halpenny adds: “This Investment Trust flow captures households buying of foreign securities via NISA accounts and it remains clear that the expanded NISA limits adopted in January 2024 continues to have a notable impact.”

Purchases of overseas investments without currency hedges create exposure to foreign currencies, potentially sustaining demand for them even as Japan’s interest rates rise.

There is some moderation elsewhere, but slower buying is still different from bringing money home.

Goldman says: “The trust accounts category, which includes the public pension fund, suggests that net purchases of foreign bonds continued in September, but at a slower pace than in August ($7.6bn vs $14.7bn in August) and below the average pace of the prior six months ($8.6bn).”

“More broadly, our preferred estimate of key unhedged investor flows suggests that demand for foreign assets has generally persisted at a similar pace over the past year and shows no obvious signs of rotation. If that were to change, however, these data would be the first place to see it.”

Bond sales do not tell the whole currency story

Japanese banks’ foreign-bond sales accelerated to $15.9 billion in September, according to Goldman, while life insurers also remained net sellers.

Those sales could look like evidence supporting Goldman’s recovery forecast, but currency hedges change their significance.

Goldman says: “While less relevant for the Yen, repatriation flows have been evident in the data for typically hedged investors (mainly banks and roughly 40% of flows by Lifers).”

A currency hedge already offsets some or all of an overseas holding’s exchange-rate exposure, so selling the asset and unwinding that protection need not generate equivalent fresh demand for Yen.

The question is whether domestic policy can alter the choices of investors who have bought abroad without protection.

MUFG points to discussions about allowing Japanese government bonds within NISA accounts, following Finance Minister Satsuki Katayama’s July suggestion that their inclusion should be considered.

That remains a potential policy change, rather than an implemented incentive already redirecting savings.

Halpenny says: “Providing tax-free opportunities to hold JGBs could well have an impact on the flows to foreign equity markets that is so evident today and given the scale of foreign equity purchases currently would be viewed as a clear yen positive.”