Japanese investors dump Eurozone bonds at fastest pace in a decade

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Japanese investors have been selling eurozone government debt at the fastest pace for more than a decade, with analysts warning that the move by the bloc’s one-based bondholders could trigger a market sell-off.

Net sales by Japanese investors stood at $41 billion in the six months to November – the latest figures released – according to data from Japan’s finance ministry and the Bank of Japan, compiled by Goldman Sachs.

At home, including the collapse of the ruling coalition in Germany leading to elections next month and the prospect of political upheaval in Europe and turmoil in France, which has been governed under emergency budget laws, has accelerated the sell-off, analysts said. Analysts say, analysts say, analysts say, analysts say, analysts say, . French bonds sold the most during the period at $26 billion.

The sale adds more pressure to European governments already reeling from borrowing costs and highlights how Japanese interest rates are rising Financial markets around the world are reshaping after years in negative territory.

The return of Japanese investors to the country is 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 eurozone bonds over the past few years, the pace has picked up in recent months.

Japanese investment flows “a steady source of” [European] Long-term demand for government bonds,” said Thomas Wyladek, economist at asset manager T Rowe Price. But markets are now “entering an era of bond surveillance” where “rapid and violent sell-offs” are likely to occur more often.

Gareth Hill, bond fund manager at Royal London Asset Management, said the scenario had long been a concern for holders of European government bonds because of historically high holdings. [among] Japanese investors” and could pressure the market.

Also, the steep costs of hedging against swings in the value of the yen have made foreign debt increasingly attractive. Despite falling from the 2022 peak, when the cost of hedging is factored in, the yield on 10-year Italian government bonds for Japanese investors is just over 1 percent, the same as Japan’s 10-year yield, according to Noriatsu Tanji, chief bond strategist at Mizuho Securities in Tokyo. He identified Japan’s regional banks as among the main sellers of European debt.

“Japanese investors must ask themselves how hard they should be holding foreign bonds,” said Andres Sanchez Balcazar, head of global bonds at Piquet, Europe’s largest asset manager.

Norinchukin – one of Japan’s biggest institutional investors – said last year it planned to offload more than 10tn of foreign bonds this fiscal year. In November, it recorded a loss of nearly $3 billion after realizing losses on large holdings of foreign government bonds in the second quarter.

Japanese investors are putting upward pressure on bond yields, which have already moved higher since the European Central Bank began shrinking its balance sheet following a massive emergency bond-buying 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 excess yield it offers over benchmark German debt – has seen large Japanese inflows in recent months.

Between June and November, as a political crisis deepened and Michel Bernier’s government fell, total flows of Japanese funds reached $26 billion, compared with sales of just $4 billion in the same period last year.

“There’s no question the buyer base 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 a cornerstone investor in several bond markets as ultra-low yields at home have made overseas investments more attractive, including to large investors such as pension funds that buy safe sovereign debt.

Total holdings of foreign bonds by Japanese institutional investors reached their peak of $3 trillion in late 2020, the IMF said.

However, as Japanese investors began to search for returns at home, their global net purchases of debt securities have shrunk by a total of $15 billion over the past five years — a far cry from the nearly $500 billion in such purchases they made the previous five years, Accenture said. According to calculations by macro strategist Alex Etra.

“Whereas Japanese bonds were quite unpopular for domestic investors in the past, they are now more attractive,” said JPMorgan’s Gorain. “It’s a structural change.”