Over the past decade, Japan has acquired almost ¥8tn (A$84bn) worth of AUD-denominated fixed income assets, three-quarters of which are sovereign bonds. Australian fixed income has lured Japanese investors with an average marginal yield of 3.7% above JGBs. AUD/JPY has historically tracked the yield differential closely. In 2014, however, the correlation broke down. Japanese inflows continued despite falling Australian yields. According to the RBA, this kept the AUD overvalued relative to commodity prices.
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