Japan’s big-money investors still sitting tight

May 1, 2013

More on the subject of Japanese overseas investment.

As we said here and here, Japanese cash outflows to world markets have so far been limited to a trickle, almost all from retail mom-and-pop investors who like higher yields and are estimated to have 1500 trillion yen ($15.40 trillion) in savings. As for Japan’s huge institutional investors — the $730 billion mutual fund industry and $3.4 trillion life insurance sectors — they are sitting tight.

If some are to be believed, the hype over outflows is misguided. Morgan Stanley for one reckons Japanese insurers’ foreign bond buying may rise by just 2-3 percent in the next two years, amounting to $60-100 billion. Pension funds are even less likely to re-balance their portfolios given large cash flow needs, the bank said.

But a Reuters survey last week revealed several insurance companies are indeed considering boosting unhedged foreign bond holdings.  Insurers currently hold almost half their assets in Japanese government bonds and risk being crowded out of the JGB market as the central bank ramps up purchases.  A recent survey by Barclays also showed Japanese investors keen on overseas debt.

Barclays analyst Bill Diviney offers the following explanation as to why institutional investors haven’t ventured out so far:

From the life insurer investment plans released last week the basic takeaway was that in terms of current levels in currency and given the rally in emerging and developed bonds of late they seem to be uncomfortable with the current price levels and the sense I get is that they are waiting fro a dip in the market. So the markets have risen in anticipation of Japanese flows but the investors themselves want to wait until there is more value and better buying levels.

He adds:

Judging from what they are saying they will be shifting allocations away from JGBs. That will have implications for fixed income market. But… their main interest is in developed markets, they are cautious and not really interested in chasing high yields. 

A survey by Barclays  (see graphic above) revealed that U.S. and German debt were Japanese investors’ preferred choices while only 20 percent of respondents thought emerging market bonds would see an increase in Japanese investment. Unsurprising, given how risk-averse these investors are. (Italy and Spain get even fewer votes) But Diviney reckons  emerging bonds will benefit from Japanese  outflows indirectly, via so-called displacement flows — if Japanese cash drives down yields on Treasuries and Bunds, some other investors might be pushed to seek returns in emerging markets, he says.

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