Japanese investors are dumping euro zone bonds at the fastest pace in a decade

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Japanese investors have been selling government debt in the euro zone at a rapid pace for more than a decade. Analysts warned that the move of one of the bloc’s cornerstones could lead to sharp market selling.

Net sales by Japanese investors rose to €41 billion in the six months to November – the latest figures – according to data from Japan’s Finance Ministry and the Bank of Japan compiled by Goldman Sachs.

The prospect of higher bond yields at home and in the political upheaval in Europe – including the collapse of the ruling coalition in Germany leading to elections next month and turmoil in France operating under an emergency budget law – have accelerated selling , say analysts, analysts. French bonds were sold the most over the period, amounting to 26 billion euros.

The turnover adds further pressure to debt levels for European governments already facing rising borrowing costs, and shows how Rising Japanese interest rates After years in negative territory, financial markets around the world are changing.

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 in recent years 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 TOWE Price. But markets are now “entering an era of bond vigilance, where “quick and violent sell-offs” may become more common.

Gareth Hill, a bond 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 overseas have continually made it less attractive. Although hedging costs are being reduced from a 2022 peak, the 10-year yield for Japanese investors is roughly the same as the Japanese 10-year yield for Japanese investors, according to Noriatsu Tanji, chief bond strategist at Mizuho Securities in Tokyo. He pointed to regional banks in Japan that are among the main sellers of European debt.

“Japanese investors have to ask themselves quite hard about the extent to which 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 offloaded more than 10 tn of foreign bonds this fiscal year. In November, it posted a second-quarter loss of about $3 billion after recognizing losses on its large holdings of foreign government bonds.

The withdrawal of Japanese investors is putting pressure on bond yields, which have already been intensifying since the European Central Bank began reducing its balance sheet following a huge emergency bond program during the coronavirus pandemic, analysts said.

France, which has one of Europe’s deepest bond markets and has historically been a favorite among Japanese investors because of 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 led to the fall of Michel Barnier’s government, total outflows from Japanese funds reached €26 billion, compared with turnover of just €4 billion in the same period last year.

“There’s no question that the buyer base has changed for France,” said Seamus Mac Gorain, head of global pricing at JPMorgan Asset Management.

Over the past 20 years, Japanese investors have become a cornerstone in several bond markets as ultra-low yields at home have made foreign investments more attractive, including to large investors such as pension funds that need to buy safe debt for the safe sovereigns.

According to the IMF, total holdings of foreign bonds by Japanese institutional investors reached $3 trillion at their peak at the end of 2020.

But as Japanese investors have started looking for returns at home, net purchases of global debt have shrunk to just $15 billion over the past five years – a far cry from the roughly $500 billion of such purchases they made in the in who have made over the past five years, according to calculations by Alex Etra, a macro strategist at Exante.

“While Japanese bonds have been fairly unattractive to domestic investors in the past, they are now more attractive,” JPMorgan’s Gorain said. “This is a structural change.”