Japanese investors are rapidly divesting from Eurozone government bonds, marking the fastest pace of selling in over a decade, prompting concerns among analysts about potential significant market sell-offs. According to recent data from Japan’s finance ministry and the Bank of Japan, compiled by Goldman Sachs, net sales by Japanese investors reached €41 billion over the six months ending in November.
This increase in sales is attributed to higher bond yields in Japan and political instability in Europe, particularly following the collapse of Germany’s ruling coalition and ongoing turmoil in France, which is currently operating under an emergency budget law. French bonds have seen the largest divestment, amounting to €26 billion during this period.
The selling trend adds strain to European governments, which are already grappling with rising borrowing costs. It underscores the impact of increasing Japanese interest rates after extended years of negative rates, influencing financial markets worldwide. Analysts note that the withdrawal of Japanese investment is a significant shift for both Japan and global markets.
Despite being net sellers of Eurozone bonds for several years, the pace of Japanese sales has intensified recently. Japanese investors have historically been a consistent source of demand for European government bonds. However, the current environment is characterized by “bond vigilance,” warranting caution among investors who might experience sudden sell-offs.
Concerns over rising hedging costs against fluctuations in the yen further diminish the appeal of foreign debt. Even accounting for decreased hedging costs from their 2022 peak, the yield on a 10-year Italian government bond for Japanese investors remains just above 1 percent, which is comparable to Japan’s 10-year yield. Analysts have indicated that regional banks in Japan are among the primary sellers of European bonds.
Institutional investors in Japan, like Norinchukin, have also indicated intentions to offload significant amounts of foreign bonds. Last fiscal year, Norinchukin planned to sell over ¥10 trillion in foreign bonds and reported a substantial financial loss attributed to its foreign bond holdings.
As Japanese investors retreat, bond yields in Europe have begun to rise, following the European Central Bank’s move to reduce its balance sheet after extensive bond purchasing during the pandemic. The decline in Japanese investments is particularly notable in France, a country that has historically attracted significant Japanese investment due to its favorable yields.
Between June and November, Japanese funds withdrew a total of €26 billion from France amid deepening political crises, a stark contrast to only €4 billion in sales during the same period the prior year. This shift indicates a changing buyer base for French government bonds.
Over the past two decades, Japanese investors have become crucial participants in various bond markets, often driven by low domestic yields that make foreign investments more appealing. At its peak in late 2020, total foreign bond holdings by Japanese institutional investors reached $3 trillion.
However, there has been a marked reduction in net purchases of global debt securities by these investors, dropping to $15 billion over the last five years, compared to approximately $500 billion in the preceding five years. This trend suggests a structural change in preference, where domestic bonds are becoming more attractive to Japanese investors compared to their foreign counterparts.
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