Japanese Shop for Bonds Overseas as Trade War Spurs Gains in Yen

(Bloomberg) -- As global investors seek refuge in haven assets amid escalating U.S.-China trade tensions, the yen’s continued strength is encouraging Japanese investors to shop for bonds abroad.

Funds from the Asian nation bought a net 1.36 trillion yen ($12.3 billion) of foreign debt last week, the most since the period ended March 22, official data showed Thursday. The yen rose to a more than three-month high of 109.02 per dollar last week, as demand for haven assets picked up after U.S. President Donald Trump threatened to impose tariffs on all Chinese imports.

While worsening Sino-American relations maybe turning global funds risk averse, Japan’s low-to-negative bond yields leave local investors with little choice but to go overseas in the quest for better returns.

“Flows into foreign bonds may have increased as the dollar fell to the 109-yen level,” said Wako Ogawa, director of FX sales at Deutsche Securities Inc. in Tokyo. Japanese investment activity was slow in April given the 10-day Golden Week holidays, but investors may have stepped up purchases after the yen advanced amid escalating trade frictions, he said.

While Thursday’s preliminary data from Japan’s Ministry of Finance don’t give a geographical break-up of the flows, a number of factors suggest that the bulk of the money may have gone into Europe, particularly Spain, where the benchmark 10-year yield slid to a record last week.

Japanese funds have taken a strong liking to Europe over the past few months as low-to-negative yields at home and high dollar-hedging costs on purchases of U.S. Treasuries sapped returns. They piled a record $29 billion into French notes in March, after purchasing an unprecedented amount of Belgium securities in January. That prompted NatWest Markets to predict that the flows will soon spill over into Spain.

Spain’s 10-year yield dropped to 0.847% on Friday, as investors grew increasingly confident the bonds can withstand political worries in neighboring Italy. Japanese funds have been net buyers of long-term Spanish debt -- including corporate bonds -- in 12 of the 15 months through March, according to the latest MOF data.

Given Japan’s “low nominal growth rate and ultra-low domestic yields, investors will continue to direct their money into overseas bonds and stocks,” said Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui DS Asset Management Co. in Tokyo.

--With assistance from Daisuke Sakai.

To contact the reporters on this story: Chikafumi Hodo in Tokyo at chodo@bloomberg.net;Masaki Kondo in Tokyo at mkondo3@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Shikhar Balwani, Liau Y-Sing

©2019 Bloomberg L.P.