Brazil Allure Was Already Fading for Japanese Before Crisis

  • Asian nation’s investors have been selling the debt since 2011
  • Weaker real discourages Japanese from buying bonds, BBH says

Japanese investors may be breathing a sigh of relief as they see political turmoil engulfing Brazil.

The Asian nation’s money managers have been mostly net sellers of Brazilian bonds since 2011, following a three-year buying spree that saw Japanese buy 2.07 trillion yen ($18.6 billion) of the Latin American country’s notes, according to balance-of-payments data from the Bank of Japan. Currency moves had already damped Japanese demand for the debt, with Brazil’s real losing more than 30 percent to the yen since the end of 2010.

“Brazilian mutual funds have become unpopular among Japanese retail investors as their performance turned bad, reflecting declines in the real,” said Masashi Murata, a currency strategist at Brown Brothers Harriman & Co. in Tokyo. “For institutional investors, given the volatility in the currency, it’s difficult to justify buying.”

With Japan’s bond rates close to zero, Brazil offered investors double-figure yields and exposure to a stabilizing, emerging economy that was also home to a sizable Japanese diaspora. The latest scandal, however, further diminishes a trade that lost a lot of its sheen when President Dilma Rousseff’s ouster whipsawed the country’s fixed-income assets.

Brazil’s 10-year bond yield surged 176 basis points Thursday, the most since February 2014, as current President Michel Temer refused to step down. A local newspaper has reported on a secret recording that allegedly reveals Temer approved hush money for a lawmaker who was the mastermind behind last year’s impeachment of Rousseff.

The allegations are the latest twist in a sprawling corruption scandal that has reached the top levels of the country’s financial and political elite. The real headed for the worst week since November 2008 against the yen, after slumping 6.5 percent on Thursday.

No Surprise

“It’s not a surprise to see this kind of political crisis in emerging markets, but the reality is that there are strong concerns and uncertainties,” said Hideo Shimomura, chief fund manager in Tokyo at Mitsubishi UFJ Kokusai Asset Management Co., which manages the equivalent of about $112 billion. “At this point, it’s unlikely to hurt sentiment severely for emerging markets as a whole.”

The outstanding balance of Japanese mutual funds investing in Brazilian bonds stood at 443.1 billion yen at the end of April, down from a peak of 2.22 trillion yen in March 2011, according to data from the Investment Trusts Association Japan. The holdings decreased by 1.9 percent in the first four months of this year.

BBH’s Murata said investors are continuing to hold Brazilian bonds to avoid realizing paper losses and receive coupons without adding to their holdings. Redemption is shown as selling in balance-of-payments reports, according to the finance ministry that compiles the data.

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