Updated March 29, 2012, 12:34 p.m. ET
Net Selling Is Some of Heaviest Since Lehman Brothers Collapse
Article from The Wall Street Journal
By TAKASHI MOCHIZUKI And MEGUMI FUJIKAWA
TOKYO—Foreign investors have been big sellers of Japanese bonds lately, unloading more than ¥2 trillion, or more than $24 billion, over the past two weeks in one of the biggest outflows seen since the Lehman Brothers shock of 2008.
The large-scale selling comes amid increasing concern among economists and others over the long-term health of the Japanese government bond market as annual bond issuance continues to rise in order to cover a budget gap.
But the sales appear to have had little impact on bond yields or the yen's exchange rate. Foreigners are a small part of the Japanese bond market, and the bonds may have been absorbed by domestic buyers, who appear less sensitive to government-borrowing worries.
Analysts said there was no clear reason for the heavy selling, although greater interest in global equities and higher-yielding U.S. Treasurys appeared to play a part. They also said it was too early to say that the selling was part of a crisis of confidence in the market, which has remained buoyant despite Japan's worsening fiscal picture.
The figures from Japan's Ministry of Finance show net sales of ¥1.14 trillion for the week ended March 24, following an outflow of ¥1.04 trillion the week before. While weekly data is often volatile, selling over four weeks totaled ¥1.57 trillion, the largest monthlong outflow since September 2009 and one of the biggest amounts since the heavy selling that came in the wake of the bankruptcy filing by Lehman Brothers Holding in September2008
"Some foreign investors might have unwound their JGB positions, partly due to the weak yen as well as other technical factors," said Tadashi Matsukawa, fixed-income investment manager at PineBridge Investment, previously named AIG Investments.
While the ¥660 trillion Japanese government bond market has long defied the skeptics, both private-sector economists and government officials say the government's overall debt level, at more than 200% of gross domestic product, isn't sustainable. The figure is well above the level for Greece when it was forced to accept an international bailout, and is expected to rise further, given that the government intends to use debt to fund half of the budget for the fiscal year that begins Sunday.
"I think we are in an extremely precarious situation," Hirohisa Fujii, tax chief of the ruling Democratic Party, said of Japan's finances in a recent interview.
But analysts say the selling doesn't appear to represent any immediate concerns about the health of the JGB market. Indeed, the yield on the benchmark 10-year bond fell back below 1.0% on Thursday, from 1.02% on March 23. It stood at 0.99% on March 9, before the large selling over two weeks, and at 0.97% on Feb. 24. The 10-year U.S. Treasury note yielded 2.196% late Wednesday, down from 2.237% on March 23 but still up sharply from 2.037% two weeks earlier and 1.91% on Feb. 24.
An improving U.S. economic outlook also appears to be a key factor in the flow of funds, analysts say. "JGBs were sold in the past weeks amid increasing expectations for yield rises in global bond markets," said Akito Fukunaga, chiefrates strategist at RBS Securities in Tokyo.
Analysts said it was uncertain where the money may have shifted, although some pointed to the fact that foreign investment in short-term money-market investments rose during the period, largely offsetting the decline in longer-term notes and bonds. The Ministry of Finance figures on bond sales include government bonds as well as other types of domestically issued debt of one year or more, and exclude short-term money-market funds.
The outflow also appears to have had little impact on the foreign-exchange market where the dollar was at ¥82.35 at the end of last week, virtually unchanged from two weeks earlier.
More broadly, there has been growing investment in the Japanese stock market, where foreigners account for approximately one-quarter of all share ownership. The Nikkei Stock Average is up 19% so far this year, making it the best performer among all major equity markets globally. There was small net buying by foreigners over the past two weeks.
Foreign investors, meanwhile, remain a small part of the JGB market, although their share rose to around 6.7% as of the end of 2011, from 4.9% at the end of 2010.
Teruyoshi Sotome, bond strategist at Mizuho Securities, said the JGB market appears to have been more popular with investors than other bond markets. He noted that the yield on the 10-year U.S. Treasury spiked about 0.40 percentage point in a recent two-week period, when the Federal Reserve's policy statement sounded a more optimistic tone about the U.S. economy, while the 10-year JGB yield only rose 0.05 percentage point.
"From this context, we need to see more data to judge whether foreigners will keep selling JGBs," he said.
—Fiona Law in Hong Kong contributed to this article.
Write to Takashi Mochizuki at takashi.mochizuki@dowjones.com and Megumi Fujikawa at megumi.fujikawa@dowjones.com
A version of this article appeared Mar. 30, 2012, on page C4 in some U.S. editions of The Wall Street Journal, with the headline: Foreign Investors Unload Japan.
Article from The Wall Street Journal