Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

A zero rate environment is no fun for any fixed income investor. It's even worse when your central bank is working against you.

The Bank of Japan has shown this year that it's no stranger to intervening in bond markets to prevent 10-year yields rising above 10 basis points. This forces Japanese life insurers to look elsewhere to make the guaranteed return of 25 basis points that the regulator imposes on their new policies. 

Reaching For Yield
Investors have to take duration risk to get any return in Japanese government bonds
Source: Bloomberg
Dotted lines represent lack of available benchmark issues.

Even though officials cut the required return from 1 percent just a few months ago, insurers still face a long-term struggle to achieve this.

So it is no wonder that in April, the start of their financial year, they laid out clear plans to invest in European government debt. But achieving those plans is another matter. 

Since then, Japanese institutions have been net buyers of about 1.2 trillion yen ($10.9 billion) of all long-term foreign debt, according to Ministry of Finance figures. So far, so good, if you're a European issuer or investor.

But actually this is 70 percent down on the same period last year, so really it's no more than a trickle. It's also not that great if you compare it to the recent fate of French bonds. Japanese investors sold 3 trillion yen of them in the run-up to the presidential elections held in late April and May, when there looked a decent chance that the nationalist anti-euro candidate could win.

French yields are now lower than when they sold, and that would naturally make anyone reluctant to get back in. But there's more to it than that. There's not enough of a yield pick-up for taking overseas risk, and so it makes sense for Japanese pension funds and life insurers to hold back.

Fading Attraction
As political risks subsided in France so did the yield pickup for Japanese investors
Source: Bloomberg
Formula calculation: French 10-year bond yield minus three-month Euribor plus three-month yen Libor (Yen basis swap- Euro basis swap)/100

Life insurers are forced to buy very long maturities to get any return on their domestic investments. As Japanese investors mostly hedge their foreign currency exposures back into yen, they need to achieve a greater return from foreign bonds in order to justify shifting funds abroad.

The 30-year Japanese bond yields 88 basis points, more than the 80 basis points on offer for 10-year German bunds, in yen terms. Of course, they could buy longer-maturity German debt to get higher yields, but that wouldn't fit with their natural conservatism. The extra duration risk, on top of the currency and political risk, would be too great. Neither are yields in France that compelling: 10-year securities only offer a 25 basis-point pickup to Germany, which is not much of an enticement compared to the 80 basis-point spread available in February. 

And this means there's a silver lining for European issuers and investors if yields do start to rise, which is a distinct possibility if the European Central Bank decides on Sept. 7 to taper bond purchases. It would make perfect sense for Japanese investors to start buying again -- they need the yield pickup.

But they don't have to rush in. There's about two thirds remaining of their financial year. They can afford to be patient.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Marcus Ashworth in London at

To contact the editor responsible for this story:
Jennifer Ryan at