Japan Goes On Bond Shopping Spree,Though Not Bunds

Japanese investors dramatically increased the export of their savings in May. It was the second consecutive month that Japanese investors were net buyers of foreign stocks and bonds having been net sellers the previous four months.

Japanese investors bought JPY2.98 trillion of foreign assets. This is roughly 60% of the total portfolio investment they have made over the past 12-months (JPY4.93 trillion). In the 12-month period ending May 2013, Japanese investors were net sellers of JPY1.83 trillion of foreign stocks and bonds.

Japanese investors have a clear preference for foreign bonds over stocks. Japanese investors bought JPY2.5 trillion of foreign bonds in May and JPY5.7 trillion over the past 12 months. This compares with JPY4.26 bln of foreign bonds bought in the 12-month period ending May 2013.

With balance of payments data released yesterday, the Ministry of Finance provided a country breakdown of its purchases. Japanese investors bought JPY1 trillion of US notes and bonds in May. This is the most since last November. Over the 12-month period ending in May, they bought JPY7.4 trillion. In the year ago period, Japanese investors had sold JPY6.8 trillion of US notes and bonds.

Japanese investors were even larger buyers of French notes and bonds. They bought JPY1.93 trillion worth of French paper. This appears to be the most since at least 2005 when the current time series began. This is the lion's share of the JPY2.6 trillion bought over the past 12-months. In the 12-months through May 2013, Japanese investors had bought JPY3.54 trillion of French paper.

French fundamentals are considerably worse than Germany's. There is a deep seated sense among Japanese investors, as well as other large pools of capital, including reserve managers and sovereign wealth funds in Asia, that given the political considerations, French bonds are as as good as bunds and pay a modest premium to boot.

Indeed it appears that Japanese investors have switched from German bunds to French bonds. They sold nearly JPY983 bln of German bunds in May and JPY3.9 trillion in the 12-month period. In the 12-months through May 2013, Japanese investors bought JPY880 bln of German bunds.

We argue that the spur of reform for Germany was the fall of the Berlin Wall and the challenges of reunification. It took some time for what the Economist called the "sick man" of Europe to recognize what it had to do. The financial crisis is forcing the periphery of Europe to reform at different speeds and in different ways. France has had the luxury of neither. The demand for French bonds eases some of the pressure on France to reform.

Japanese investors had been sellers of Canadian and Australian notes and bonds in the 12-month period ending May 2013 (JPY132 bln and JPY1.19 trillion respectively). However, they have returned to those markets. Japanese investors bought JPY131 bln of Canadian notes and bonds in May to bring the 12-month figure to JPY635 bln. Japanese investors bought JPY107 bln of Australian bonds in May and JPY760 bln for the 12-month period.

The weekly MOF data for June suggests that Japan's appetite for foreign bonds remained strong. The data, for which a country breakdown is not provided, shows Japanese investors bought JPY2.4 trillion of foreign bonds in June. This time series is not directly comparable with the monthly BOP series, but the weekly data point to an even stronger appetite for foreign bonds than in May.