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Japanese investors have embarked on a significant selloff of Eurozone government debt, reaching the most aggressive pace in over a decade. The net sales surged to €41bn in the six months leading to November, according to data from Japan’s finance ministry and the Bank of Japan, analysed by Goldman Sachs.
The massive disposal of European bonds has been primarily driven by rising domestic yields in Japan and mounting political uncertainties across Europe. The collapse of Germany’s ruling coalition and French political turbulence, which has resulted in emergency budget legislation, have intensified these sales. French bonds bore the brunt of the exodus, with €26bn in net sales during this period.
This shift in investment patterns poses significant challenges for debt-laden European governments already grappling with elevated borrowing costs. The trend exemplifies how Japan’s departure from negative interest rates is reshaping global financial markets. Société Générale’s head of global asset allocation, Alain Bokobza, describes Japanese investors’ domestic return as a “game changer for Japan and global markets”.
The growing costs of hedging against yen fluctuations have made overseas debt increasingly less attractive for Japanese investors. When accounting for hedging costs, the 10-year Italian government bond yield offers Japanese investors merely 1 per cent, comparable to domestic Japanese yields. Regional banks in Japan have emerged as primary sellers of European debt.
Norinchukin, a major Japanese institutional investor, announced plans to divest more than ¥10tn of foreign bonds this financial year. The institution reported a substantial loss of approximately $3bn in the second quarter, attributed to realised losses on foreign government bond holdings.
The retreat of Japanese investors, who have historically been cornerstone bondholders in several markets, marks a structural transformation in global financial markets. Their total foreign bond holdings peaked at $3 trillion in late 2020, but recent years have witnessed a dramatic decline in net purchases, signalling a fundamental shift in investment strategies.
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