The yen rose against the dollar and euro in Asia Tuesday as Japanese institutional investors reacted to news that China significantly increased its buying of Japanese government bonds in the first four months of this year.
Data from Japan's Ministry of Finance showed that China stocked up on Y541 billion worth of Japanese sovereign bonds from January though April, a pace much faster than that of recent years.
Long-term-focused investors in Japan such as life insurance firms jumped on the data as they suggest China may further increase its JGB purchasing--a transaction which involves yen-buying in the process.
Still, other market participants were unmoved, saying the amount of China's JGB buying is still too small to have a significant impact on the currency market. The data showed China bought about Y200 billion worth of JGBs in April.
"Y200 billion wouldn't be able to move the yen market if you consider the overall trading volume," said Satoshi Tate, a senior foreign exchange dealer at Mizuho Corporate Bank. "This China thing won't have a lasting impact on the currency market."
As of 0450 GMT, the dollar was at Y87.60 from Y87.75 overnight.
Looking ahead, investors will watch for how U.S. Treasury yields move in reaction to upcoming U.S. economic data, including the Institute for Supply Management's non-manufacturing index due at 1400 GMT.
"Currency investors keep getting cues from U.S. Treasury yield movement. If any U.S. data turn out weak and push the yields lower, currency investors will sell the dollar further," said Minoru Shioiri, chief manager of forex trading at Mitsubishi UFJ Morgan Stanley Securities.
A Dow Jones poll of economists forecasts the main index of the ISM data will log 54.9 in June, slightly worse than 55.4 in May.
Elsewhere, the euro was at Y109.80 and $1.2532 from Y110.02 and $1.2541 last night.
A report by The Times of London saying the U.K. government is drawing up contingency plans for the possible collapse of BP PLC weighed on the single currency. It said the oil giant has liabilities of up to $70 billion due to April 20's oil disaster in the Gulf of Mexico.
Dealers said the development indicates the issue is much more serious than they had anticipated, and that it could keep pushing down investor sentiment toward the region and the euro for the time being.
The ICE U.S. Dollar Index, which tracks the performance of the greenback against a trade-weighted basket of currencies, was at 84.428 from 84.573 in Canada Monday.
