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Japanese investors have sold eurozone government debt at the fastest pace in more than a decade, with analysts warning that the move by one of the bloc’s cornerstone owners could lead to a sharp market selloff.
Net sales by Japanese investors rose to €41 billion in the six months to November – the latest figures to be released – according to data from Japan’s Finance Ministry and the Bank of Japan, compiled by Goldman Sachs.
The prospect of higher bond yields at home and political turmoil in Europe – including the collapse of the ruling coalition in Germany leading to elections next month, and unrest in France which has been operating under an emergency budget law – have accelerated the sell-off. , analysts say. French bonds were the most sold during the period at €26bn.
The sales add further pressure to indebted European governments already facing a jump in borrowing costs, and highlight how rising Japanese interest rates after years in negative territory are reshaping financial markets around the world.
Japanese investors coming home is a “game changer for Japan and global markets,” said Alain Bokobza, head of global asset allocation at Société Générale.
Although Japanese investors have been net sellers of eurozone bonds for most of the past few years, the pace has picked up in recent months.
Japanese investment flows have been “a steady source of (European) government bond demand for a long time,” said Tomasz Wieladek, an economist at asset manager T Rowe Price. But markets are now “entering an era of bond vigilance” where “rapid and violent selling” may occur more frequently.
Gareth Hill, a bond fund manager at Royal London Asset Management, said the scenario had “long been a concern for European government bondholders, given the historically high holdings (among) Japanese investors” and could make market pressure.
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Moreover, rising costs of hedging against swings in the value of the yen have made overseas debt increasingly unattractive. Despite falling from a peak in 2022, when hedging costs are factored in, the 10-year yield on the Italian government bond for Japanese investors is just over 1 percent, roughly the same as the 10-year Japanese yield, according to Noriatsu Tanji, Chief Bond Strategist of Mizuho Securities in Tokyo. He pointed to regional banks in Japan as among the main sellers of European debt.
“Japanese investors have to ask themselves quite hard how much they should hold foreign bonds,” said Andres Sanchez Balcazar, head of global bonds at Pictet, Europe’s largest asset manager.
NORINCHUKIN – one of Japan’s biggest institutional investors – last year said it planned to load more than ¥10 billion in foreign bonds this financial year. In November, it posted a loss of about $3bn in the second quarter after realizing losses on its large holdings of foreign government bonds.
The withdrawal from Japanese investors is putting upward pressure on bond yields that have already moved higher since the European Central Bank began shrinking its balance sheet following a broad emergency bond-buying program during the coronavirus pandemic, analysts said.
France – which has one of Europe’s deepest bond markets and has historically been a favorite among Japanese investors because of the extra yield it offers over German debt – has seen large Japanese outflows in recent months.
Between June and November, as a political crisis deepened that resulted in the fall of Michel Barnier’s government, total outflows of Japanese funds reached €26bn, compared with sales of just €4bn in the same period a year earlier.
“There is no doubt that for France the buyer base has changed,” said Seamus Mac Gorain, head of global rates at JPMorgan Asset Management.
Over the past 20 years, Japanese investors have become a cornerstone investor in some bond markets as ultra-low domestic yields have made foreign investments more attractive, including for large investors such as pension funds that need to buy debt. secure sovereign.
Total foreign bond holdings by Japanese institutional investors reached $3 trillion at their peak at the end of 2020, according to the IMF.
However, as Japanese investors have begun to seek returns at home, their net purchases of global debt securities have shrunk to just $15bn in total over the past five years – a far cry from the nearly $500bn in such purchases. that they did in the previous five years, according to calculations by Alex Etra, a macro strategist at Exante.
“While Japanese bonds were quite attractive to domestic investors in the past, they are more attractive now,” JPMorgan’s Gorain said. “This is a structural change.”
