Yen Investors Homeward Bound as BOJ Stimulus Seen Boosting Bonds

Updated on
  • Japanese investors turned net sellers of foreign debt: MOF
  • 20-year JGBs are becoming the choice, Deutsche Bank says

Japanese investors are returning to their local debt market amid speculation the central bank will expand bond-buying stimulus just as rising hedging costs discourage forays abroad.

Banks and insurers bought a net 688 billion yen ($5.8 billion) in super-long Japanese government notes in December, a reversal from a year earlier when they were net sellers, data from Japan Securities Dealers Association showed. Japanese investors sold more long-term foreign debt than they bought in the week to Jan. 16, a separate Ministry of Finance data showed.

This year’s global stock market rout is putting pressure on BOJ Governor Haruhiko Kuroda to accelerate the already unprecedented easing as a strengthening yen and falling oil prices threaten inflation goals. The prospect of further Federal Reserve tightening has also kept hedging costs elevated, eating into the yield advantage of overseas investment.

“Net buying in super-long JGBs is part of a homeward-bound move,” said Shuichi Ohsaki, the chief rates strategist at Bank of America Corp.’s Merrill Lynch unit in Tokyo. “In addition to widening basis swaps, falling overseas yields are pushing this move back home. We are expecting additional BOJ easing with more buying in the super-long sectors.”

Japanese net buying of foreign long-term bonds has slowed since peaking at 1.12 trillion yen in the the week to Sept. 5, which was the most since early November 2014, according to MOF data. Cross-currency basis swaps show costs to borrow the dollar for yen holders have more than tripled from two years ago.

Net purchases of super-long JGBs by the nation’s banks and insurers in the last two months of 2015 averaged 900 billion yen, double the average of their net buying in such bonds for the first 10 months of 2015, according to JSDA.

“There is still a certain degree of appetite for foreign bonds among Japanese investors, but basis swaps remain a factor behind the homeward-bound move towards yen bonds,” said Makoto Yamashita, a strategist for Japanese interest rates at Deutsche Bank AG’s securities unit in Tokyo. “The 20-year zone is becoming the choice for investors looking for carry and capital gain income as 10-year yields previously favored are low.”

The global stock rout amid concerns over growth in China has boosted demand for safety of debt. Ten-year Treasury yields fell to a three-month low this week. Accounting for hedging costs, the U.S. note yields about 0.5 percent compared with the 0.225 percent benchmark JGB yield and 0.92 percent for 20-year debt. The yen traded at 117.78 against the dollar as of 12:10 p.m. in Tokyo on Friday, and has advanced the most among major currencies this year.

The BOJ said last month it will lengthen the average maturities of its bond holdings to as long as 12 years from 10 years previously. The bank announces its policy decision on Jan. 29.


“With expectations for additional BOJ stimulus heightening and removing any potential for a rise in yields, investors may be front-loading buying where there are still yields left,” said Souichi Takeyama, a rates strategist at SMBC Nikko Securities Inc. in Tokyo. “A stronger yen makes it easier for foreign investment but the latest weekly data showed Japanese investors aren’t necessarily swayed to go outbound. Declining overseas yields work to damp their appetite for foreign bonds.”

Not all expect an immediate stimulus expansion.

“The BOJ buying is huge in size without additional easing,” Deutsche Bank’s Yamashita said. “We don’t expect any more stimulus.”

Merrill’s Ohsaki said the BOJ will probably boost stimulus in April. In addition, the government is slashing two-year and five-year bond sales from April, which will likely also help shift BOJ buying into longer maturities, he said.

“When the BOJ does decide to expand, there is no doubt that it will increase bond-buying, centering around the super-long debt,” Ohsaki said. That will put further pressure on longer bond yields to fall closer to shorter, he said.