Japanese investors snapped up foreign bonds for a third straight week last week and analysts say that the long-awaited trend may be finally under way, signaling the next leg lower for the yen.
Data released on Thursday showed Japanese investors bought a net 549.3 billion yen ($5.48 billion) of foreign bonds in the week to July 20. That followed net buying worth about 1.106 trillion yen in the previous week, the largest amount since September 2012.
"We are seeing more foreign bond buying out of Japan and there is a need for the Japanese to search for higher yields," said Emma Lawson, senior currency strategist at National Australia Bank.
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"We do think this will continue to happen, especially among the financial institutions and that will put more downward pressure on the yen," she added.
July looks set to be the first month of net foreign bond buying in six months, Reuters reported.
An aggressive monetary stimulus program by the Bank of Japan (BOJ) has dampened the appeal of domestic assets and Japan's investors have been expected to venture overseas for higher yields for some time.
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Domestic investors such as insurance and pension funds, traditionally big holders of Japanese government bonds (JGBs), are being squeezed out of the market by the BOJ's bond-buying program.
The BOJ has said it would buy 7.5 trillion yen ($743 billion) worth of long-term bonds a month – that's roughly 70 percent of new debt issuance.
But in the first half of the year, Japanese investors defied expectations by repatriating their funds back home.
Analysts say a rise in U.S. Treasury yields may now be tempting Japanese investors overseas.
"There's a third component [behind why the yen will weaken] and that's rising U.S. yields, which should incentivize Japanese real money to invest overseas in search of higher yields," Gareth Berry, currency strategist at UBS Investment Bank, told CNBC Asia's "Squawk Box."
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He said monetary stimulus and the government's economic plans to revive Japan were other reasons why he expected the yen to weaken further.
Treasury yields have started to creep higher in recent months as the bond market starts to position for an unwinding of the Federal Reserve's $85 billion-a-month asset purchase program as U.S. economic conditions improve.
The 10-year Treasury yield is trading at about 2.59 percent. That's more than 50 basis points above where it traded two months ago. That also compares with a yield of about 0.79 percent on 10-year JGBs.
"This is one of the greatest achievements of what [BOJ Governor Haruhiko] Kuroda has done so far – he has managed to suppress JGB yields while U.S. yields are rising. It's quite unusual but not surprising because he is buying more JGBs than the MOF [Ministry of Finance] is issuing on a net basis," Berry said.
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Analysts say that once that buying of foreign bonds gets into full swing, the yen will resume the sharp falls seen in the first half of the year.
The yen was trading at about 100.25 per dollar on Thursday. It has weakened about 16 percent so far this year and Berry expects the currency to weaken to 110 by the end of 2013 and to 120 by the end of next year.
— By CNBC.Com's Dhara Ranasinghe; follow her on Twitter @DharaCNBC