By Dominic Lau
TOKYO (Reuters) - Japanese investors piled into foreign bonds in July, making their biggest net purchase in three years - providing early evidence that Prime Minister Shinzo Abe's expansionary policies are having the desired effect.
Japanese investors bought 3.482 trillion yen ($36 billion) of foreign bonds in July, the largest amount since August 2010, data from the Ministry of Finance showed.
It also marked the first net monthly purchase since January, as investors sought higher returns overseas after the Bank of Japan launched its massive bond-buying stimulus campaign.
Purchases of overseas assets could potentially weaken the yen, and give a tailwind to Japanese exporters, as Abe attempts to revive the world's third-largest economy through "Abenomics". But any impact on foreign exchange markets would be blunted if investors hedged their bond purchases.
"Most Japanese investors are seeking higher yields, particularly outside of Japan," said a fixed-income fund manager at a foreign asset management firm in Tokyo.
"I am not so sure if the current government wants us to go outside of Japan to invest. The ultimate target for them is internal investment to push up the domestic economy. Of course, the weaker yen is one of the methods to push inflation higher."
For the week through, Japanese investors were net buyers of 689.9 billion yen of foreign bonds, its fifth straight week of net purchases - the longest such run since November.
Last week's net buying of foreign bonds came as yields on the 10-year benchmark U.S. Treasuries hit a four-week high of 2.7490 percent, not far from a 23-month peak of 2.755 percent touched on July 8.
By contrast, the yield on the 10-year Japanese government bonds has been trading in a range of 0.75 to 0.85 percent in the past month, with the BOJ committed to achieving a target of 2 percent inflation in two years.
The Japanese central bank stunned financial markets in April, promising to inject $1.4 trillion into the economy in less than two years.
The BOJ move had earlier raised expectations that the aggressive push to reflate the economy would lead to a massive flight of capital out of the country.
In the first six months of 2013, Japanese investors had repatriated 15.54 trillion yen, including foreign securities and money market instruments, defying earlier expectations. That compared with an outflow of 6.67 trillion yen for the January-June period a year ago.
The BOJ's aggressive easing has also lifted foreign investors' interest in Japanese stocks this year. They bought 960 billion yen of Japanese equities in July, its 10th straight month of net purchases - the longest such streak in seven years.
But for the latest week, foreign investors sold 42.2 billion yen of Japanese shares after a net sale of 61.8 billion yen in the prior week - the first two consecutive weeks of net selling since November.
($1 = 96.5850 Japanese yen)
(Editing by Eric Meijer)