Japan must network with Asian and international investors to encourage diversification of government bond holdings to boost the country’s economic health, according an official from the Japan’s Ministry of Finance (MoF) – though offering these investors incentives to buy the bonds proves tricky.
Satoru Shibata, director for debt management and Japanese government bond (JGB) relations and director of research at the MoF, said 90% of the country’s JGBs are held by domestic investors, which poses risks at a time when Japan’s debt-to-gross domestic product (GDP) ratio has risen above 200%.
“The JGB market needs to strengthen more and more its communications with Asian investors and countries to broaden the investor base,” said Shibata in an interview with Asiamoney PLUS.
Low foreign investor participation into the JGB market is an anomaly when compared to other major sovereign issuers. After the US, Japan is the world’s largest issuer of government bonds, comprising 30% of the global government bond market at the equivalent of US$42 trillion. By comparison 56.9% of US Treasuries was held outside the country by December 2011, according to the US Treasury Department.
This is because low bond yields offer little incentive for international investors. Japan’s five-year JGBs yield 0.2%, and its 10-year credit yields 0.8%. This compares to US Treasuries – which have also had yields plunge to record lows – which pay 0.625% and 1.625%, respectively.
While Shibata recognises that foreign investors need incentives to enter the market, he says that encouraging greater foreign participation by selling higher-yielding credits is not part of Japan’s plan.
“From our Ministry of Finance side, we would like to control our financing costs, so lower interest rates is very important,” he told Asiamoney PLUS. “We would like to keep the low interest rates.”
Luring greater foreign participation without offering higher bond yields can be achieved as long as economic conditions stay favourable, Shibata says. The economic environment has driven more international investors to Japan’s market, which is viewed as a safe haven compared to other global geographies. Shibata notes that this has caused record-high foreign investment in the JGB market – though that figure is still just 8.7%.
While financial regulators are aware that the boost in global investors’ interest JGBs stems from ongoing economic volatility in the West - and that they’re apt to turn away from the market to seek higher returns elsewhere when the economic environment improves - Shibata believes the global economy will remain volatile for some time to come. This means investors will continue buying JGBs in a bid to purchase safer securities, and regulators won’t need to offer greater incentives to attract their attention.
“We don’t have a special target for a proportion of foreign investors in the market … right now it’s 8.7%, which is the highest in history,” said Shibata. “When there’s risk-off demand [as we are seeing from Europe] investors have bought JGBs … Officially I cannot talk about the focus of the global market, but many investors understand that the European problem is still very serious, and won’t be resolved so shortly. And if the European problem continues for a while, this kind of risk-off investment for JGBs could also continue.”
Regardless of yields and the global economic outlook, Shibata is confident that Japan will see strong foreign investor demand for in the long run because the country’s strong brands, manufacturing strength and innovative products, as well as stable banking system, give it an edge on other developed and developing markets.
“Our economic fundamentals are still strong. Our domestic savings are still huge, and our net foreign assets, foreign reserves and the current account also provide huge income. Basically our fundamentals are still robust and sustainable, and of course fiscal consolidation is also a big issue, and we are making our best efforts to improve on that,” explained Shibata, referring to Japan’s 10% consumption tax hike, which passed through the Upper House in August, as an example.
Yet even if global investors do not increase their participation in the JGB market, Japan is prepared to support its bond market on its own. While the government would like to diversify Japan’s debt beyond its shores, both Bank of Japan (BoJ) and the MoF recognise that foreigners are not crucial to the bond market.
“We’re intending to diversify our investors because more than 90% of them are domestic and less than 10% are foreign, but we don’t think that foreign investors increasing their investment is a problem by itself, so the Japanese market is very open,” he explained, emphasising that onshore investors’ demand for government bonds has driven yields to their low level. As long as these investors are able to support the market, the system survives.
Deflationary issues
Meanwhile , Shibata notes that Japan’s strong yen is also a priority for the MoF.
The currency, which is trading at a high ¥78.8 to the dollar, is targeting a 1% inflation rate to combat the country’s fiscal deficit. Proposals to do this have included printing more cash and buying foreign treasury bonds – the latter of which has become a contentious issue for Japanese regulators. So far, BoJ has bolstered Japan’s asset-buying programme to achieve long-term inflation, while regulators mull over other strategies.
Instead, Shibata says Japan’s main goal is to elevate the country out of its deflationary predicament through manufacturing, which he says is still a strong asset for the country.
“Japan still has huge assets and very strong fundamentals,” he said, noting the quality of Japan’s products and iconic brands that attract global buyers. “Japanese companies are also facing many difficulties, but actually their structure is basically healthy and our banking system is also healthy. The fundamentals are relatively good compared to other advanced countries.”