Japan investors switch to
European bonds
Re-weighting from US$ going at a fast pace: research head
HE Japanese are finally boarding Europe's single currency
train.
Having virtually ignored European economic and monetary union in
recent years, Japanese investors have switched in the last three
months to European government bonds from US Treasury bonds.
Japan's Ministry of Finance says that, as a proportion of all
Japanese foreign bond purchases, US Treasury bonds have fallen
from 82 per cent in August 1997 (on a six-month moving average)
to just 45 per cent in August 1998. On the latest single monthly data
available, the proportion fell to below 30 per cent, with European
government bond markets the main beneficiaries.
"What we are seeing is a clear long-term reweighting of Japanese
portfolio investments from the dollar into the euro-zone," said
Avinash Persaud, head of currency research at JP Morgan. "This is
happening at quite a fast pace."
Many Japanese, including senior government officials, believe prices
in the US Treasury bond market and stock market are dangerously
close to bubble levels.
The advent of EMU is an opportunity to diversify their risks into an
increasingly liquid alternative.
Although more than 90 per cent of the Bank of Japan's (BOJ)
foreign exchange reserves are dollar-denominated (mostly in US
Treasury bonds), analysts say it will not take long for the BOJ to
follow Japanese insurance companies into the euro-zone.
"Neither the D-mark nor the French franc bond markets are liquid
enough on their own to allow the Japanese investor to diversify
against the dollar," said Joanne Collins, senior economist at Daiwa.
"The creation of the euro suddenly changes the picture."
Daiwa Europe, the investment bank, says that in the first half of
1998, Japanese overseas portfolio investment increased by US$75
billion (S$121.3 billion). The growth has been spurred by the "Big
Bang" deregulation of the Japanese financial sector, which started in
April. These reforms are releasing a large amount of funds for the
purchase of overseas securities.
Three key areas are affected: foreign exchange regulations have
been loosened, allowing insurance and pension funds to invest more
of their assets abroad; restrictions on the investment decision of
public pension funds have been relaxed; and the Zaito system, which
directs state investments into low-cost domestic assets, is set to be
dismantled, which will release an estimated US$2.2 trillion. Much of
it will go abroad. -- FT
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