Japan Sells Foreign Bonds as Currency Hedge Costs Surge: Chart of the Day

Japanese investors are unwinding overseas bond holdings as Europe’s debt crisis drives the cost to protect against currency shifts to a more than two-year high.

The CHART OF THE DAY shows London interbank offered rates for three-month dollar loans rose to the highest since May 2009 relative to those in yen. The spread, used to set currency hedging costs, widened as concern the euro zone may fracture spurred demand for dollars. The chart’s lower panel shows Japanese investors were net sellers of foreign bonds in 5 out of 11 months in 2011 and sold the most in a year in November.

“The spike in dollar-borrowing costs won’t stabilize so easily,” said Makoto Noji, a senior debt and currency strategist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s second-biggest banking group by market value. Foreign debt is becoming “less attractive” in Japan, he said.

Domestic investors sold 1.27 trillion yen ($16.4 billion) of overseas bonds and notes last month, the most since November 2010, Ministry of Finance data showed. Kokusai Asset Management Co.’s Global Sovereign Open, Japan’s biggest mutual fund, divested all of its Italian government bonds by Nov. 10, according to a report from the fund.

Before European Union leaders held a two-day summit on the crisis last week, Standard & Poor’s warned that 15 euro nations were at risk for a credit downgrade, including the AAA-rated France and Germany.

Dollar Libor was at 0.54 percent on Dec. 9, the most since July 2009, even after the Federal Reserve, the Bank of Japan and four other central banks lowered the cost of emergency dollar funding on Nov. 30.

-- Editors: Rocky Swift, Jonathan Annells

To contact the reporters on this story: Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net; Kazumi Miura in Tokyo at kmiura1@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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