Foreign investors concerned about the continuing problems in Japan and the weakness of the yen are i...
Foreign investors concerned about the continuing problems in Japan and the weakness of the yen are increasingly selling out of Japanese government bonds.
Hajime Takata, chief strategist in the fixed income research department at Mizuho Securities, says the net selling of Japanese government bonds in January was the highest for nearly 12 months. He also points out that total foreign ownership of Japanese government bonds is relatively low, at 5% to 6%.
Takata adds that the current spate of selling by foreign investors comes on the back of concern over a possible downgrade of Japan's government debt denominated in yen.
He says: 'In addition to this is the sharp increase in the pessimism about Japan from overseas since the end of last year. Furthermore, from the end of December, the authorities have been favouring a weaker yen, which has accelerated a sell-off of Japan and caused overseas firms to steer clear of Japanese assets.'
Last week, the yen fell against the dollar for the second day in three, in the wake of a fall in Japanese consumer confidence. The yen was down to 128.95 per dollar on 12 March, from 128.26 per dollar, on the back of a 2.6% fall in the Nikkei on 12 March, which fell after the publication of a negative survey of consumer confidence in Tokyo.
About one in 10 Japanese people live in Tokyo and the survey found that respondents expected economic conditions to worsen over the next six months. The yen was also down amid concerns that the government may act to push its value down in a bid to aid economic recovery.
Threadneedle is neutral on Japanese government bonds. Laurence Mutkin, head of bond strategy at the group, says: 'The economy is still in a dire state, but there are signs of a cyclical rebound ' just because there is a structural disaster does not mean the cycle is dead.'
Mutkin adds that Moody's has recently downgraded several life insurance companies in Japan, which he says is a negative for the bond market. He believes it has raised concerns that Japanese government debt denominated in local currency could be downgraded from Aa3 to A1 by the rating agency.
He says: 'This is bad news, as it is a reminder that the financial system in Japan is still suffering from key structural problems.'
But the Japanese government debt market received a boost earlier this month from domestic institutional buyers ' a Japanese public pension fund said it would add to its holdings of Japanese government debt in the financial year starting on 1 April. Japan's Ministry of Health, Labour and Welfare said it will buy about ¥3.45 trillion of Japanese government bonds by March 2003. Public pension funds bought some ¥200bn in government securities out of ¥2 trillion they invested in the current financial year. Japanese government bonds saw their biggest gain in three weeks on the news, with the yield on a 10-year Japanese government bond falling by three basis points to 1.47%. The yield on five-year Japanese government debt is 0.6% and 0.1% for the two-year part of the market.
The market was also encouraged on the back of a well-subscribed ¥1 trillion auction of 15-year Japanese government bonds. The sale drew bids worth 2.66 times the amount of debt on offer, higher than the 2.56 times seen in the last auction of 15-year debt at the end of 2001.
Domestic institutional demand for JGBs.
Ten-year yields down.
Signs of cyclical upturn in Japan.
Foreign investors selling out of JGBs.
Concerns over yen weakness.
Downgrade of government debt.
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch
To drive progress