The yen's surge to a 15-year peak against the dollar this week comes amid mounting worries that the U.S. economic recovery is losing steam and follows a broad, two-month slide in the dollar.
A drop in U.S. Treasury yields, a perception among market players that the U.S. Federal Reserve may be more willing to conduct aggressive monetary easing than the Bank of Japan, and talk of seasonal fund repatriation by Japanese investors have all contributed recently to the yen's rise.
Over the course of the year, there has been a steady trickle of overseas investment by Japanese institutional and retail investors, and the yen has gained less against currencies other than the dollar in the past few months.
So why has the yen been so strong against the dollar in particular, despite unappealingly low domestic interest rates and long-term concerns about Japan's ageing population and huge mountain of public debt?
The yen's rise seems counter-intuitive, especially in view of the fact that Japanese investors, particularly households, have been steadily investing abroad in 2010.
In fact, net buying of overseas equities, bonds and money market instruments by Japanese investment trusts from January to July has risen 65 percent from the same period last year to 2.8 trillion yen ($32.9 billion).
But analysts say such overseas investment by Japanese mutual funds, or toushin funds, seemed to be headed increasingly towards higher-yielding currencies rather than the dollar, suggesting that such capital outflows have not provided much support to the U.S. unit.
Most of the investment trusts that have been launched recently have been focused on the (Brazilian) real, and do not have a direct impact on the dollar against the yen, said Daisuke Karakama, market economist for Mizuho Corporate Bank's forex division.
Among institutional investors, life insurers have increased their foreign securities investment, albeit much more slightly, to 1.2 trillion yen from 1.1 trillion yen in January-July 2009.
But since the cost of hedging against foreign exchange risk is now relatively cheap, life insurers are likely gravitating more to currency-hedged investment, meaning the net impact on currencies is probably smaller than such numbers would suggest, analysts say.
One factor helping to offset the impact of such capital outflows from Japan is overseas buying of Japanese assets, especially short-term money market instruments, market players say.
Overseas investors bought a net 5.5 trillion yen in Japanese equities, bonds and money market instruments combined from January to July, Ministry of Finance data shows.
The bulk of overseas buying of Japanese assets this year has been in short-term money market instruments, as seen most clearly in China's record buying spree of Japanese debt.
In the first six months of 2010, total Chinese net buying of Japanese short- and longer-term debt combined came to more than 1.7 trillion yen, far outstripping the record 255.7 billion yen it bought in 2005.
Market players say that such overseas demand for short-term Japanese debt, either as part of foreign reserves diversification or due to investors seeking a temporary parking place for their money, has likely helped support the yen. (Editing by Hugh Lawson)