Tuesday, April 8, 2014

Foreign Investors Selling out of Japanese Debt

By Kosaku Narioka

Paltry yields on bonds denominated in a weakening currency? Um, no thanks.

That’s essentially the message from overseas investors, who sold a net Y351 billion ($3.4 billion) of Japanese government bonds and other types of debt in March, data out Tuesday showed. That means a net sale of Y2.5 trillion for the fiscal year just ended, the first such net selling in four years.

“Bond flows may be reflecting (investor) moves to reduce yen assets,” said Chotaro Morita, head of Japan rates strategy at SMBC Nikko Securities.

The Bank of Japan8301.TO +3.09%’s massive monetary stimulus, launched last April, has changed Japanese market conditions. By helping to reignite optimism about the economy’s prospects, the BOJ move sparked buying in Tokyo stocks. The massive easing also drove down the yen by some 10% against the U.S. dollar, reducing the attractiveness of yen-denominated assets.

Amid signs of an economic recovery, inflation appears to be returning to Japan, as the BOJ desires – something that would erode principal and interest payments on bonds – yet the massive spurt of central-bank buying has kept yields on Japanese government bonds low. The yield on benchmark 10-year Japanese government bonds was at 0.62% Tuesday, up just seven basis points from before the BOJ’s April 2013 easing announcement.

During the global financial crisis and the euro debt crisis, the yen’s value as a safe haven kept interest in JGBs strong despite the pitiful yields on offer. But with U.S. yields expected to rise as the Fed tapers its own bond-buying program – likely dragging global yields higher in their wake – the few basis points offered by JGBs are no longer so appealing to investors.

Considering that most Japanese government debt is owned locally, low yields are a blessing for a government carrying by far the highest debt load among developed economies. Foreign investors, on the other hand, can be forgiven for wanting a little more bang for their buck.

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