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Japanese investors sold euro zone 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 net market selling .
Net sales by Japanese investors reached 41 billion euros in the six months to November – the latest figures to be published – 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 Germany’s ruling coalition, leading to elections next month, and unrest in France which operated under a law on the emergency budget – accelerated sales, according to analysts’ analysts. French bonds were the most sold during the period at 26 billion euros.
The sales add further pressure to indebted European governments that are already facing a jump in borrowing costs and underscore how rising Japanese interest rates after years in negative territory are reshaping financial markets around the world.
Japanese investors returning home are a “game changer for Japan and global markets,” said Alain Bokobza, head of global asset allocation at Societe Generale.
Although Japanese investors have been net sellers of euro zone 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] The demand for government bond for a long time,” said Tomasz Wieladek, economist at Asset Manager T Rowe Price. But markets are now “entering an era of bond vigilance” where “rapid and violent selling” could occur more often.
Gareth Hill, head of bond funds at Royal London Asset Management, said the scenario had “long been a concern for holders of European government bonds, given historically high holdings [among] Japanese investors” and could put pressure on the market.
In addition, skyrocketing costs of hedging against swings in the value of the yen have made overseas debt increasingly unattractive. Despite falling from a 2022 peak, when hedging costs are accounted for, the 10-year Italian government bond yield for Japanese investors is just over 1%, about the same as the yield Japanese bond to 10 years, according to Noriatsu Tanji, chief bond strategist at Mizuho Securities in Tokyo. He pointed out that regional banks in Japan are among the main sellers of European debt.
“Japanese investors face a pretty tough question 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 planned to offload more than ¥10Tn of foreign bonds this financial year. In November, it posted a second-quarter loss of about $3 billion after realizing losses on its heavy holdings of foreign government bonds.
The pullback by Japanese investors is putting upward pressure on bond yields that have already risen since the European Central Bank began shrinking its balance sheet after a massive emergency purchasing program during the coronavirus pandemic, investors said. analysts.
France – which has one of the deepest bond markets in Europe and has always been a favorite among Japanese investors because of the extra yield it offers over benchmark German debt – has seen big outflows Japanese in recent months.
Between June and November, as a political crisis deepened that led to the fall of Michel Barnier’s government, total outflows from Japanese funds reached 26 billion euros, compared to sales of just 4 billion euros during the same period of the previous year.
“There is no doubt that for France the buyer base has changed,” said Seamus Mac Gorain, head of global pricing 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 investment more attractive, particularly to large investors such as bond funds. pension who need to buy secure sovereign debt.
Total holdings of foreign bonds by Japanese institutional investors reached $3 trillion at their peak at the end of 2020, according to the IMF.
However, as Japanese investors began seeking returns at home, their net purchase of global debt shrank to just $15 billion in total over the past five years – a far cry from $500 billion in purchases they made in the previous five years, according to calculations by Alex Etra, a macro strategist at Exante.
“While Japanese bonds were quite unattractive to domestic investors in the past, they are more attractive now,” said JPMorgan’s Gorain. “It’s a structural change.”
