A seismic shift is underway in Japan’s investment landscape, as the country’s investors begin to reverse their decades-long love affair with foreign assets. In a stunning turnaround, Japanese investors have snapped up a record ¥28 trillion ($192 billion) of their nation’s government bonds in the first eight months of the year, while slashing their purchases of foreign bonds by almost half and trimming their buying of overseas equities to less than ¥1 trillion.
This dramatic pivot is expected to have far-reaching consequences for global markets, as Japan’s $4.4 trillion in overseas investments – an amount larger than India’s entire economy – begins to flow back home. According to Arif Husain, head of fixed-income at T. Rowe Price, this trend is poised to become a “super cycle” that will shape the investment landscape for the next five to 10 years.
The catalyst for this shift lies in the narrowing interest rate gap between Japan and other countries, which has made foreign investments less attractive. As the Bank of Japan raises rates, yields on 30-year Japanese government bonds have risen above 2%, making them more appealing to domestic investors. Insurers like T&D Asset Management Co. and Dai-ichi Life Insurance Co. have indicated that they will increase their holdings of local debt once yields reach 2.5% and 2%, respectively.
The implications of this trend are massive, as Japan’s investors are the largest foreign holders of US government bonds and own nearly 10% of Australia’s debt. They also control hundreds of billions of dollars worth of stocks from Singapore to the Netherlands and the US, owning between 1% and 2% of the markets.
While some investors, like Japan Post Insurance Co., are still investing offshore, others are already unwinding their foreign holdings. Norinchukin, Japan’s largest agricultural bank, is selling off ¥10 trillion in foreign bonds after suffering losses due to rising rates. San-in Godo Bank Ltd. is also planning to bulk up its holdings of Japanese government bonds while selling off Treasuries.
The potential for market disruption is significant, as a rapid unwinding of carry trade bets could lead to chaos similar to the August 5 sell-off, when global hedge funds and speculators scrambled to exit their positions. However, strategists believe that the pace of repatriation will be more gradual, with the Federal Reserve’s commitment to achieving a soft landing reducing the odds of a recession.
As Japan’s rates continue to normalize, the incentives for investors to bring their money home will grow. According to Shoki Omori, chief desk strategist at Mizuho Securities Co., “investors everywhere are underestimating the risk of big repatriation flows in the long run.” The trend is already underway, and it’s time to take notice.
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