Japanese Bet Korean Demographics to Spur Repeat of 60% JGB Gains

  • Aging a `very serious' issue for South Korea, BOK chief says
  • ‘Japanization’ of Korean economy to keep rates low: strategist

Japanese investors are loading up on won bonds, counting on South Korea repeating their own nation’s demographic fate.

140.1 billion yen ($1.1 billion) September, Japanese government data show. Sovereign debt returned almost 60 percent in Japan over two decades as the proportion of people aged over 65 reached 25.8 percent. The ratio in South Korea is projected to rise to 32 percent by 2040 from 13 percent now.

South Korea is showing similarities with Japan as a graying society spends less, curbing inflation, while saving more in fixed-income funds. Bank of Korea Governor Lee Ju Yeol said this week that aging is a “very serious” issue and structural factors are playing a “big” role in slowing Asia’s fourth-largest economy. Demand for debt helped cut the yield on 10-year won sovereign bonds below that on comparable U.S. Treasuries last month.

“Investors are expecting a further deflation of the economy in Korea," said Ken Hirose, head of investment strategies at Mitsubishi UFJ Morgan Stanley PB Securities in Tokyo. “People often talk about the further ‘Japanization’ of the Korean economy and it further implies a longer, lower interest-rate environment."

Source: Bloomberg

Japanese investors stepped up purchases from net 102 billion yen of Korean debt in August. The buying is led by institutional investors seeking to meet long-term obligations, who are taking advantage of the yen’s highest levels against the won in a year, said Hirose. The won has strengthened 4.7 percent against the yen since Sept. 30, and advanced 1.6 percent versus the dollar, according to data compiled by Bloomberg.

An investor who buys South Korea’s 20-year sovereign bonds on Thursday would earn almost 50 percent over the next decade if the yield falls to zero in the period, according to data compiled by Bloomberg.

Beset by a slump in growth amid low inflation and a record current-account surplus, South Korea risks following Japan’s so-called “lost twenty years” during the 1991-2010 period, the Finance Ministry said in July last year.

Gross domestic product expanded an average 4.4 percent annually in the 2001-2011 period, before slowing to 2.8 percent in the last three years. That’s comparable with what was seen in Japan prior to the 20-year slump, in which growth averaged 1 percent. Korean inflation eased to 1.3 percent from 4.1 percent during the same period, and consumer prices have risen by less than 1 percent for almost a year compared with the BOK’s target range of 2.5 percent to 3.5 percent.

Strong Rating

The central bank, which has cut its benchmark interest rate four times since August 2014 to a record 1.5 percent, projects 2.7 percent expansion in 2015 and 3.2 percent in 2016. While the nation’s potential growth rate has slowed, it isn’t below 3 percent, Governor Lee said Nov. 12.

Interest in buying higher-yielding assets will persist as the Bank of Japan maintains a bond-buying stimulus policy, said Hirofumi Suzuki, an economist at Sumitomo Mitsui Banking Corp. in Singapore. He said South Korean debt is attractive because of the sovereign’s strong credit rating, with Moody’s Investors Service granting it a Aa3 ranking, the fourth-highest investment grade.

The yield on South Korea’s 10-year notes has fallen 32 basis points this year to 2.29 percent on Thursday, Korea Exchange prices show. It reached an all-time low of 2.04 percent on Oct. 28. Similar-maturity Japanese bonds yield 0.30 percent compared with 2.78 percent two decades ago.

‘Deflation Risk’

“The Korean economy is not good and is at risk of deflation,” supporting bonds, said Hideaki Kuriki, who invests in the nation’s debt at Sumitomo Mitsui Trust Asset Management in Tokyo., a firm with $54 billion in assets. “The won will be strong because the Korean current-account surplus is steady.”

Korean bonds are also favored by global funds and central banks who view them as a relatively safe investment among emerging markets. While foreigners bought a net $35.9 billion of the securities in 12 months, latest data from South Korea’s Financial Supervisory Service show their holdings accounted for 6.5 percent of won-denominated listed bonds as of Nov. 16. Foreign central banks accounted for 45.5 percent of overseas holdings at the end of 2014, Finance Ministry data show.

“Market liquidity conditions are quite good,” said Takahide Irimura, a Tokyo-based senior economist at Mitsubishi UFJ Kokusai Asset Management Co., which oversaw about $82 billion of assets at the end of September, including South Korean debt. "It’s possible for BOK to add to monetary easing, which is a supportive factor for bonds as well.”

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