By Marc Chandler

Japan's Ministry of Finance publishes portfolio flows on a weekly basis. The latest data, released Thursday, show recent trends continuing.

Japanese investors continue to buy foreign bonds and stocks. Over the past nine weeks, Japanese investors have purchased roughly $87 billion of foreign bonds and $15 billion of foreign equities.

Foreign investors have sold a little less than $20 billion of Japanese shares and a smidgen of Japanese bonds. The net portfolio flows out of Japan have been dominated by Japanese investors themselves.

On the other hand, noncommercials (speculators) in the International Monetary Market currency futures have been buying yen. Since early May they have swung from a substantial short position (65,600 contracts, with a ballpark value of $9 billion) to a long position (37,900 contracts, with a ballpark value of $5.2 billion).

Since early May, the yen has been easily the strongest major currency, rising almost 7.3% against the dollar, more than 10% against the euro and nearly 12% against the Australian dollar.

The Bank of Japan has not intervened in the foreign exchange market for several years. That alone would suggest that the bar is high. The strength of the yen is not desirable for a country that anticipates to still be in the grip of deflation throughout the remainder of the year.

However, BOJ intervention remains unlikely. The market has been very orderly, and intervention is not a tool that can be deployed simply because an official does not like the price action.

Implied volatility has fallen from 16.5% in late May to about 11.25% yesterday. The premium the market pays for yen calls over yen puts, which may illustrate a skew in the market views and positions, is not extreme.

Implied volatility may increase if the dollar continues to approach the multiyear low set late last year near 84.80 yen, but alone that may also prove insufficient to spur official action.

That said, given the changing political landscape in Japan, a combination of a strong yen and deflationary pressures could increase the pressure on the BOJ to take additional measures, such as increasing its Japanese government bond purchases, which currently stand at 1.8 trillion yen a month.

A global leader with close to 200 years of experience, Brown Brothers Harriman helps many of the world's most sophisticated mutual funds, investment managers, banks and insurance companies achieve their international business objectives. BBH provides specialist services and innovative solutions to clients that include a global custody network of close to 100 markets, accounting, administration, securities lending, foreign exchange, cash management and brokerage services. BBH operates a global business through 14 locations, including New York, Boston, New Jersey, Philadelphia, Charlotte, Chicago, Dallas, London, Dublin, Luxembourg, Zurich, Grand Cayman, Hong Kong and Tokyo.

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