FEATURE-Euro attracts Japan investors before debut
05:38 a.m. Jul 08, 1998 Eastern
By Risa Maeda
TOKYO, July 8 (Reuters) - Japanese investors have already bought
billions of Ecu-based bonds ahead of the planned launch of the euro in
January 1999, analysts and brokers say.
Given record low interest rates at home, investors have been looking
abroad for higher yields, and many have picked the Ecu because of good
economic fundamentals in Europe and a need to diversify dollar-dependent
foreign portfolios.
A series of jumbo Ecu-based bond issues earlier this year provided a
chance for institutional investors to encounter the new investment
vehicle, and retail investors are catching up.
''Japanese investors, including individuals, have bought a couple of
billion Ecus in the past three months,'' said Ryoji Kawamura, head of
international bond sales at Paribas Capital Markets Ltd in Tokyo.
EURO BOND MARKET EXPECTED TO GROW
About half of major Japanese institutional investors have already tapped
the Ecu-based bond market, where outstanding volume has topped 10
trillion yen, Kawamura said.
Outstanding volume of Japanese government bonds (JGBs) stood at about
258 trillion yen at the end of March.
But analysts said after January 1, the simple redenomination of the 11
euro participant countries' outstanding bonds into euros will create a
major bond market, slightly bigger than the Japanese bond market and
about a half the size of the U.S. bond market, the world's biggest.
The euro-based securities market is expected to expand as well, with its
underwriting economies, trade and population comparable to those of the
United States, they said.
''The debut of euro will be benign, as it will attract fresh capital,''
said Masayuki Kichikawa, a senior economist of Nomura Research
Institute's international financial research group.
When introduced, the euro will be used as a major financial transaction
currency because a unification of euro-region bonds will give the new
market liquidity and stability, he said.
Analysts said interest rates in the 11 euro nations were likely to trend
upward in the near future, while the U.S. economy was nearing a turning
point because the U.S. current account deficit was ballooning due to a
strong dollar and near ''bubble'' rises in asset prices.
''There is more risk in investing in U.S. financial markets this year
than last year,'' Kichikawa said.
Japan's biggest insurance firm, Nippon Life Insurance Co, recently told
Reuters it had boosted new money investment in European fixed-income
assets since the start of the current fiscal year on April 1, while
shying away from new investments in U.S. assets that dominate the bulk
of its portfolios.
Although it declined to say how much money was invested in European
assets in the April-June quarter, Nippon Life said it planned to
maintain such a stance throughout the year.
INVESTORS SEEK JUMBO ISSUES
Brokers said the recent jumbo Ecu-based bond issues met demand from
Japanese institutional investors who had become cautious about the
credit risks of borrowers after some major Japanese financial firms
failed last November.
Tadao Sakashima, chief trader at the non-yen fixed income trading
department at Daiwa Securities, said Japanese investors seem to prefer
liquidity to the yield spread from a benchmark bond, which usually
narrows when creditworthiness of borrowers increases or when issuing
volume increases.
''They seem to think even if the spread is wide, the income gain may be
wiped away when the foreign exchange rates fluctuate more than 20 to 30
basis points. So liquidity is their number one priority because they may
still enjoy capital gain,'' Sakashima said.
Among the most popular Ecu-based bonds are Sweden's two billion Ecu 5.0
percent bond due January 28, 2009, and Finland's two billion Ecu 5.0
percent bond due April 25, 2009, which were launched on April 21 and May
5, respectively, brokers said.
These terms are attractive when compared with a 2.3 percent coupon rate
for a 20-year JGB auctioned on Wedneday.
Italy's four billion Ecu 5.0 percent bond due May 1, 2008, launched on
February 12, came too early, although Japanese purchases in the
secondary market are solid, they said.
''Japanese investment in Ecu-based bonds has accelerated since the
Bundesbank gave a go-ahead to the 11 euro nations on March 26,''
Paribas' Kawamura said, referring to the German central bank's report
backing the launch of the European monetary union on schedule.
As well as shifting to Ecu from dollar and yen, some investors are
shifting from existing European currencies to avoid converting the face
value of bonds, Daiwa's Sakashima said.
The Ecu is to be replaced by the euro on a one-for-one basis, but
existing European currencies are to be converted into euros by
procedures and values that differ from nation to nation.
RETAIL INVESTORS CATCHING UP
Brokers said retail investors have also been getting into the market
since the member countries were confirmed at an EU Summit in May.
One of the latest examples is the Salomon Euro Bond Fund, an Ecu-based
fund invested in European bonds set up by an Irish subsidiary of Salomon
Brothers Asset Management Ltd.
During the initial subscription period between June 22 and June 30, the
sales representative in Japan, Kokusai Securities, sold 32.5 billion yen
of the fund with a minimum sales unit of 5,000 Ecus.
''They know the earlier they invest, the larger their profits will be in
taking advantage of the euro,'' said Akira Horiguchi, chief manager at
Kokusai Securities' products and services department in the firm's asset
management division.
He said sales of the firm's first Ecu-based fund were mostly in the one
million to five million yen range, reflecting retail investors' needs to
diversify their portfolios. Currently, dollar investment in trust funds
sold by Kokusai Securities is about six to seven times higher than
European currencies, while yen investment is about three times as much
as dollar investment.
Brokers said several Ecu-based investment trust funds included money
market funds (MMFs), a customer-friendly type of investment trust that
will be launched later this year.
According to Ministry of Finance data, net Japanese foreign bond buying
in April rose to a record 2.8057 trillion yen, up from net sales in
March of 1.3148 trillion yen.
((Tokyo Treasury Desk +81-3 3432 8570, fax +81-3 3432-7462
tokyo.newsroom+reuters.com)) |
