Any respite for Japan bonds is likely to be short -term

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The writer is the strategist of market rates developed by APAC in Société Générale

The attention of global investors is addressing Japanese bond markets for a good reason. The fragile imbalance of supply demand for longest date bonds in Japan has broken by a deceleration in the demand for national investors with 30 -year yields that briefly touch records at the end of May.

Since the returns become more attractive, there has been a return of the narration that Japanese investors could begin to repatriate funds abroad. This issue is never far from the surface since Japan has the second largest external assets in any country in ¥ 533tn ($ 3.7TN) at the end of 2024, according to the Ministry of Finance of Japan.

The consequences could be material. If the capital of investments abroad is absorbed at home, this can moisten the demand for international assets. Given the total size of portfolio investments, even the percentage changes of single digit digits could see hundreds of billions of capital flows. Trying to predict when these real flows will take place is almost impossible. The size of the net position means that it is likely that changing portfolio assignments is slow. Instead of guessing when, we believe it is better to follow the money. Japan MOF offers high frequency weekly flow data, which should be where the first waves of any investment geography change will appear.

What show the data? The opposite of repatriation. Since the beginning of March, Yen has won around 4 percent against the dollar. Japanese investors have responded to the loud buying more foreign active, buying a net equivalent of ¥ 7.5 billion during this period, according to MOF data. This includes the largest weeks of registered foreign bonds. Given the size of the flows, it is reasonable to assume that this has slowed down and even helped to reverse some of the recent yen profits.

This is not a unique reaction. From July to mid -September 2024, after the Bank of Japan increased interest rates to 0.25 percent and US job data. UU. They cooled unexpectedly, Yen won around 15 percent against the dollar. This rally was helped at that time for a bad positioning, with brief positions of leverage funds that bet on a drop in the Yen in the highest in seven years.

Once again, Japanese investors used the monetary strength to obtain a spree of foreign assets of foreign assets, buying a combined ¥ 10.9tn of assets abroad, according to MOF data. The most slow movement balance data later offered more details, which showed that the Japanese funds bought ¥ 6.7tn in the sovereign document and backed by the US government. UU. During July and August, the latter being the largest monthly flow in the registry.

But there is clearly a more general bond market problem worldwide that needs to be solved. The bond supply must be better remodeled to match the demand, since the markets deal with the transition of what the former governor of the Ben Bernanke Federal Reserve called the “excess global savings” with what the governor of the European Central Bank Isabel Schnabel has called the “excess of global bonds.”

This change comes from the substantial needs of government indebtedness and an increase in the offer of “safe assets” as central banks relax the quantitative bond purchase programs to support economies. Add to this greater volatility and a high risk of changes to trade and government policy and it is obvious that investors will want compensation to assume the risk of buying long -term debt.

In Japan, the ownership of the government bond market is 52 percent. As their balance extends, private investors must collect the slack. Life insurers (17.5 percent), banks (12.7 percent), pension funds (8.9 percent) and foreigners (6.4 percent) constitute the next larger headlines, according to the data of the BOJ. But some insurers have already pointed out their intention to reduce the super long bond property over time. National and regional banks have also rebalance their lengths of yen bond portfolios, in a movement to limit the risk of interest rate. And pension funds are largely adhere to their existing allocation divisions in asset classes. This has meant that foreigners have been the only important buyers of long bonds, according to the faults of the flow in JSDA data.

The MOF is configured to take a first step to address the problem. They have agreed to meet with the distributors on June 20, and they are likely to make the rare movement to change bond sales in response to factors other than a new budget. It is likely to reduce long -term bond sales in favor of a greater short -term broadcast. We suspect that this can give a respite for long -date links, but it is unlikely to change the medium term issue.