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Japanese investors sell the eurozone state debt to the fastest pace in more than decades, and analysts warn that the move of one of the basic bond owners could lead to a sharp market sale.
Net sales of Japanese investors increased to EUR 41 billion in six months ended with November – the latest information that will be published – according to the Japanese Ministry of Finance and Bank of Japan, which was collected by Goldman Sachs.
The prospects for higher bonds at home and political reversals in Europe – including the breakup of the ruling coalition in Germany, which will lead to the election next month, and the turmoil in France, which operates under the Emergency Budget Law – accelerated sales, analysts say. French bonds were most sold during this period with EUR 26 billion.
Sales further pressed the in charge of European governments already facing the leap of borrowing costs and emphasizes that growing Japanese interest rates After years, in negative territory, they have been transformed by financial markets around the world.
The return of Japanese investors home is “Game of Game for Japan and Global Markets,” said Alain Bokobza, head of the global asset distribution at Société Générale.
Although Japanese investors have been net eurozone bond sellers for the past few years, the tempo has been accelerated in recent months.
The Japanese investment flows have been “a long time stable source (European) demand for government bonds,” said Tomasz Wieladek, an economist at T Rowe Price assets. But markets now “enter the era of bond wakefulness” where “fast and violent sale” could happen more often.
Gareth Hill, manager of the Royal London Asset Management Fund, said the scenario “has long worried about the owners of European state bonds, given the historically high proportions of Japanese investors” and that it could put pressure on the market.
In addition, the increasing cost of protecting against the change in the value of yen has made foreign debt more and more unattractive. Despite the fall from the peak from 2022, when the cost of protection protection is included, the yield to 10-year-old Italian state bonds for Japanese investors is just over 1 percent, which is about the same as Japanese 10-year yield, according to Noriaths Tanja, Misho Mizuho Securities Bond Strategist in Tokyo. He pointed out that regional banks in Japan are among the main sellers of European debt.
“Japanese investors are sure to be very much wondering to what extent they should keep foreign bonds,” said Andres Sanchez Balcazar, head of global bonds in Pictet, the largest European property manager.
Norinchukin – one of the greatest Japanese institutional investors – said last year that he plans to pay more than 10 trillion of foreign bonds of this financial year. In November, he recorded a loss of about $ 3 billion in the second quarter after he achieved losses on his large estates of foreign state bonds.
The withdrawal of Japanese investors is pressured to increase the yield on bonds that have already increased since the European Central Bank has started reducing its balance sheet after an extensive emergency bond program during Pandemia Koronavirus, analysts say.
France – which has one of the deepest bond markets in Europe and has been historically a favorite among Japanese investors because of the additional yield it offers compared to the reference German debt – has experienced a large Japanese outflow in recent months.
Between June and November, as the political crisis deepened, resulting in the decline of the Michel Barnier Government, the total castings of Japanese funds reached EUR 26 billion, compared to sales of only 4 billion euros in the same period of the previous year.
“There is no doubt that the base of customers has changed for France,” said Seamus Mac Gorain, head of global rates at JPMORGAN Asset Management.
Over the past 20 years, Japanese investors have become investors of the foundations in several bond markets, as ultrasound yields at home have made foreign investments more attractive, including for large investors such as pension funds that need to buy safe state debt.
Total estates of foreign bonds of Japanese institutional investors reached $ 3 trillion at their peak at the end of 2020, according to the IMF.
However, as Japanese investors started looking for return at home, their net purchases of global debt papers decreased to a total of only $ 15 billion over the past five years – which is far from approximately $ 500 billion in such purchases they have done in the previous five years , according to the calculations of Alex Etra, a macro strategist at Exante.
“While Japanese bonds were quite unattractive to domestic investors in the past, they are now more attractive,” said Gorain of JPMorgan. “It’s a structural change.”
