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Japanese investors are selling euro zone government bonds at the fastest pace in more than a decade. Analysts warn that the move by one of the bloc’s top bondholders could lead to sharp market sell-offs.
According to data from the Japanese Ministry of Finance and the Bank of Japan compiled by Goldman Sachs, net sales by Japanese investors rose to 41 billion euros in the six months to November, the latest figures to be released.
The prospect of higher bond yields at home and political unrest in Europe – including the collapse of the governing coalition in Germany, leading to elections next month, and unrest in France, which is operating under an emergency budget law – have accelerated selling, analysts say. French bonds were the most sold during the reporting period at 26 billion euros.
The sales add pressure to indebted European governments already facing rising borrowing costs and highlight how this is happening rising Japanese interest rates After years in negative territory, financial markets around the world are changing.
The return of Japanese investors to their homeland is “a turning point for Japan and global markets,” said Alain Bokobza, head of global asset allocation at Société Générale.
Although Japanese investors have been net sellers of euro zone bonds for much of the past few years, the pace has accelerated in recent months.
Japanese investment flows have “long been a stable source of demand for (European) government bonds,” said Tomasz Wieladek, an economist at asset manager T Rowe Price. But markets are now “entering an era of bond vigilance” where “fast and sharp sell-offs” could become more common.
Gareth Hill, fixed income fund manager at Royal London Asset Management, said the scenario “has long been a concern for holders of European government bonds given the historically high holdings (among) Japanese investors” and could put pressure on the market.
In addition, the rising costs of hedging against fluctuations in the value of the yen have made foreign debt increasingly unattractive. Despite a decline from its 2022 peak, the 10-year Italian government bond yield for Japanese investors is just over 1 percent when hedging costs are taken into account, which is roughly the same as the 10-year Japanese government bond yield, according to Noriatsu Tanji, chief bond strategist at Mizuho Securities in Tokyo. He noted that regional banks in Japan were among the main sellers of European debt.
“Japanese investors have to ask themselves quite carefully to what extent 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 largest institutional investors – said last year that it plans to sell more than 10 trillion yen worth of foreign bonds this fiscal year. In November, the company posted a second-quarter loss of about $3 billion after realizing losses on its large holdings of foreign government bonds.
The retreat by Japanese investors is putting upward pressure on bond yields, which have already risen since the European Central Bank began reducing its balance sheet following a large emergency bond-buying program during the coronavirus pandemic, analysts said.
France – which has one of Europe’s deepest bond markets and has been a perennial favorite of Japanese investors due to the extra yield it offers over German benchmark bonds – has seen large Japanese outflows in recent months.
Between June and November, as the political crisis deepened and led to the fall of Michel Barnier’s government, total outflows from Japanese funds reached 26 billion euros, compared with sales of just 4 billion euros in the same period last year.
“There is no question that the buyer base in France has changed,” said Seamus Mac Gorain, head of global rates at JPMorgan Asset Management.
Over the past 20 years, Japanese investors have emerged as major investors in several bond markets as extremely low domestic yields have made foreign investments more attractive, including for large investors such as pension funds that need to buy safe government bonds.
According to the IMF, Japanese institutional investors’ total holdings of foreign bonds reached $3 trillion at their peak at the end of 2020.
But as Japanese investors have begun to look for returns domestically, their net purchases of global debt have shrunk to a total of just $15 billion over the past five years – a stark contrast to the roughly $500 billion they made this year According to calculations by Alex Etra, a macro strategist at Exante, over the last five years.
“While Japanese bonds have been quite unattractive to domestic investors in the past, they are now more attractive,” said JPMorgan’s Gorain. “This is a structural change.”
