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Forex pairs in this Article » USD/JPY (New York) - According to Research Analyst Gareth Berry at UBS, “We should not expect higher US yields to trigger yen outflows instantaneously.”

The first instinctive reaction to a vigorous selloff in US fixed income will be to join in – this is now a key reason why Japanese investors continue to sell overseas bonds. It is not too surprising either given that in June 2003, the initial reaction of Japanese investors to rising US 10-year yields was to sell foreign bonds. Reports in the financial press suggest global bond funds have been seeing brisk outflows recently – something, which should also make its presence, felt in the Japanese weekly flow data released overnight.

“Even foreign central banks were better sellers of UST over the past two weeks – that explains the sudden decline in USTs held at the New York Fed on behalf of foreign official institutions. So the conservative stance of Japanese investors up to now makes sense, but we believe the incentives to increase foreign holdings are slowly falling into place – we keep our year-end USD/JPY forecast at 110.” Berry notes.
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