Rate jujitsu is no blow to Japan’s foreign assets
04/08/2023 01:44
(The author is a Reuters Breakingviews columnist. The opinions
expressed are her own.)
By Una Galani
MUMBAI, Aug 4 (Reuters Breakingviews) - When markets
zig, the Bank of Japan 8301.T zags. Its latest surprise –
allowing long-term interest rates to rise last week – sent the
country’s government bond yields higher. Yet there is slim
chance Japanese investors will swiftly bring home their $5.4
trillion in overseas assets. Low domestic returns and years of
stagnation in the world’s third largest economy will make any
repatriation a drip, not a flood.
For decades, Japan fed other countries’ voracious appetite
for debt. No other nation holds more than its $1 trillion in
U.S. Treasuries. Local institutions like Japan Post Bank
7182.T and the Government Pension Investment Fund also own
around 6% of France’s sovereign bonds and about 10% of
Australia’s debt, according to International Monetary Fund data.
That made sense. As the East Asian economy flatlined,
Japanese investors found more bang for their yen elsewhere. The
risk for international bond markets has always been that a spike
in domestic rates would prompt Japanese funds to sell foreign
assets and send the money back home. Last week’s BOJ decision to
relax its “yield curve control” (YCC) policy, allowing 10-year
benchmark yields to rise up to 1%, from 0.5% previously, moved
the market a step closer to that worrisome moment.
Indebted countries can relax for now. Japan’s short-term
interest rates are still negative, and BOJ Governor Kazuo Ueda
is likely to keep them at -0.1% because medium-term inflation is
projected below his 2% target. The YCC tweak did send yields on
10-year government bonds to the highest level since April 2014.
But that’s only 0.65%, and the spread between Japan and U.S.
two-year bond yields is around 4.9%, near a 20-year high. For
his part, Ueda seems determined to slow any rise in borrowing
costs with emergency bond-buying, as he did on Thursday.
Japanese investors are trimming some overseas positions.
Their holdings of U.S. Treasuries have fallen from $1.2 trillion
to less than $1.1 trillion in the year to May, according to
official data. But there’s a technical reason. Japanese
institutions use yen to buy dollar-denominated bonds. To
insulate themselves against currency movements, many investors
borrow dollars at short-term rates and pledge to return them
back to the lender once they sell the U.S. bonds. The climb in
U.S. interest rates in the past year, however, means hedging
costs now exceed 10-year Treasuries’ returns, according to
Capital Economics.
This slow retrenchment may continue until U.S. and euro zone
rates start falling. But until the Land of Rising Sun becomes
the land of relatively attractive yields, money won’t rush home.
Follow @ugalani on Twitter
CONTEXT NEWS
The Bank of Japan tweaked its bond yield control scheme on
July 28, allowing long-term interest rates to rise more freely.
Markets interpreted the move as a first step towards ending
decades of ultra-loose monetary policy designed to kickstart a
stagnant economy.
The BOJ has kept short-term interest rates at minus 0.1% and
the 10-year government bond yield at around 0%, plus or minus 50
basis points - a policy known as “yield curve control”. Last
week, the central bank said the band was no longer a “rigid
limit” but a “reference” and added it would allow an upper limit
of up to 1%.
The yield on 10-year government bond bonds hit 0.65% on July
3.
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(Editing by Francesco Guerrera and Thomas Shum)
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