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Japanese investors have been selling 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 bondholders could lead to sharp market sell-offs.
Net sales by Japanese investors rose to €41bn in the six months to November — the latest figures to be released — according to data from Japan’s ministry of finance and the Bank of Japan, compiled by Goldman Sachs.
The prospect of higher bond yields at home and political upheaval in Europe — including the collapse of the ruling coalition in Germany leading to elections next month, and turmoil in France which has been operating under an emergency budget law — have accelerated the sales, 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 returning 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 stable 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 sell-offs” could happen more often.
Gareth Hill, a bond fund manager at Royal London Asset Management, said the scenario had “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, soaring costs of hedging against swings in the value of the yen have made overseas debt increasingly unappealing. Despite coming down from a 2022 peak, when hedging costs are accounted for, the 10-year Italian government bond yield for Japanese investors is just over 1 per cent, which is roughly the same as the Japanese 10-year yield, according to Noriatsu Tanji, chief bond strategist of Mizuho Securities in Tokyo. He pointed to regional banks in Japan as being among the main sellers of European debt.
“Japanese investors must be asking themselves quite hard to what extent they should be holding 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 — last year said it planned to offload more than ¥10tn of foreign bonds this financial year. In November, it recorded a loss of around $3bn in the second quarter after realising losses on its large holdings of foreign government bonds.
The pullback by Japanese investors is putting upward pressure on bond yields that have already moved higher since the European Central Bank started to reduce its balance sheet after a vast emergency bond-buying programme during the coronavirus pandemic, said analysts.
France — which has one of Europe’s deepest bond markets and has historically been a favourite among Japanese investors due to the additional yield it offers over benchmark 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, Japanese funds’ total outflows reached €26bn, compared with sales of just €4bn in the same period the previous year.
“There is no question 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 several bond markets as ultra-low yields at home have made foreign investments more attractive, including for big investors such as pension funds who need to buy safe sovereign debt.
Total holdings of foreign bonds by Japanese institutional investors reached $3 trillion at their peak in late 2020, according to IMF.
However, as Japanese investors have started to search for returns at home, their net buying of global debt securities have shrunk to just $15bn in total over the past five years — a far cry from the roughly $500bn in such purchases they made in the previous five years, according to calculations by Alex Etra, a macro strategist at Exante.
“Whereas Japanese bonds were quite unattractive for domestic investors in the past, they are more attractive now,” said JPMorgan’s Gorain. “That is a structural change.”
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