Japan wall of money hasn’t begun

IT’S strange when the prospect of money flows starts supporting confidence, rather than actual money flows. Heading into 2013, it seemed that one of the big stories would be currencies – euro-dollar was ripe for a break-out from its tightly traded risk-on, risk-off risk range. But nobody saw the extreme stimulus measures from the Bank of Japan coming, nor the subsequent hasty yen weakness.

Since the Bank of Japan unveiled its $1.4 trillion (£912bn) stimulus plan on 4 April, the yen has dropped more than 8 per cent against the dollar. The Bank’s new governor Haruhiko Kuroda has signalled he’s ready to maintain an ultra-loose monetary policy beyond the next two years, and he stands to offer even more stimulus if need be – albeit while closely monitoring whether asset bubbles start forming.

In the West, market analysts were quick to speculate that money would start flowing out of Japanese debt and into German, French, and US debt because Japan’s bonds are yielding less. But while I have heard a lot of market participants refer to this “Japanese wall of money” over the last week, the facts, so far, don’t support the notion.

According to the Japanese Ministry of Finance, Japanese investors sold a net ¥1.15 trillion (£7.6bn) of foreign bonds last week – the largest amount sold in a year. But it may be that investors are choosing to sell debt across the board. They don’t want Japanese bonds, given massive distortions caused by buying by the Bank of Japan. They don’t want US debt. because the Fed could rein in quantitative easing in the not-so-distant future. And they aren’t thrilled by European debt given ongoing Eurozone uncertainties. So where will Japanese debt investors invest? The Japanese equity market? Watch this space.

This week will see the G20 finance ministers meeting, and they could discuss Japanese monetary actions and the dangers of a full-fledged currency war. Another big event will be the Italian parliament debating the election of a new President. This is happening before a new government is formed, as the three main political blocs still can’t come to agreement on a workable coalition. Other events include the European Central Bank president Mario Draghi being questioned by the European Parliament on the Bank’s Annual Report. In the UK, the Monetary Policy Committee minutes could hint at the potential for more stimulus, while manufacturing surveys in the US will be closely watched after recent weak labour figures and the unexpected fall in March retail sales data.

Louisa Bojesen is presenter of CNBC’s European Closing Bell. Follow Louisa on Twitter @louisabojesen