Japanese Investors Saying 'No Thanks' to Government Bonds

The Mainichi Shimbun (original in Japanese) reported early Thursday that Japanese Government Bonds’ (JGBs) popularity is rapidly falling among individual investors. Beginning in 2003, the Ministry of Finance (MoF) has sold two types of JGBs (a fixed-rate 5-year and a variable-rate 10-year) four times a year to individual investors. However, as interest rates have been held at zero (remember ZIRP) to near-zero levels for years, Japanese individual investors may finally be voting with their purses. The October 5-year issue had a coupon of 0.6%, the lowest since the program began in ‘03, and less than half the peak coupon rate of 1.5% in July ‘07.

The MoF now only expects to raise Y1.3 trillion (US$14.3B) this year from individual investors, down from a prior estimate of Y2.4 trillion, and considerably lower than the record Y7.2 trillion raised in ‘05. Through the end of this September, individual investors held Y27.7 trillion or 4.6% of JGBs outstanding. The MoF argues that recent individual investor reluctance for JGBs is not an issue because their weighting is so low. However, it goes without saying, as the article accurately points out, that it is an issue, as the government is poised to take on even more debt in the face of declining tax revenues.

In fact, the MoF is reportedly planning to introduce a fixed three-year JGB for individual investors next July. At this time, it’s hard to imagine a warm welcome, let alone a return to previous years’ embracing of JGBs. The MoF may be right in not being very worried, since it can just pressure domestic institutional investors to pick up the slack. So whether individual investors like it or not, it’s probably the case that they will remain proxy buyers of JGBs.

Japan watchers and investors will readily recognize and perhaps even sympathize with the plight of domestic savers. The golden days of the yen carry trade seem so distant with US$1/Y90-level support so sticky. It’s a real shame that Japanese companies don’t pay quarterly dividends as is common practice in the U.S., for instance, since household, quality Japanese companies are in some cases paying dividends at multiples of what JGBs offer. The desperate search for yield could be called off. Instead of chasing the latest overseas investment fad or making risky leveraged forex trades, maybe something more productive could be achieved.

Disclosure: The author has no direct exposure to JGBs, and does not believe a crisis is looming for Japan despite David Einhorn’s position, and in spite of the serious problems the country faces but continues to bundle into a bumbling status-quo.

Comments

[Mad Hedge F...:]

chp The collapse of the Japanese government bond market has long been the holy grail of the international hedge fund community. Unfortunately, it has remained just that for nearly 20 years, much talked about, unattainable, and some would say imaginary. During the early eighties, I took the entire pension fund of the Foreign Correspondents’ Club of Japan out of US dollar bonds and put it into JGB’s, then yielding 10%, earning the eternal gratitude of the staff there. Even today, I am showered with free drinks and lunches when I visit Tokyo. After the 1990 stock market crash, JGB’s rocketed on a flight to safety bid, the ten year eventually reaching an unimaginable yield of only 0.46%. During this decade, we have largely traded in a 1.20% to 1.90% range. Every wave of government stimulus spending brought hopes of an imminent collapse in bond prices. But the country’s gun shy institutional investors weren’t buying it, and the end result was soaring national debt, a still stagnant economy, and 1,000 bridges to nowhere, some of them truly gigantic. Hedge fund guru, Julian Robertson, annually wrote a nine figure check to the JGB market anticipating a rate spike which never appeared. However, the day of reckoning for the JGB market may at last be coming. The savings rate has dropped from 20% during my time there, to a spendthrift 3%, because real falling standards of living leave a lot less money for the piggy bank. The national debt has rocketed to 200% of GDP, and 100% when you net out government agencies buying their own securities. Japan has the world’s worst demographic outlook. Now that the country is entering its third lost decade, unfunded pension fund liabilities are exploding. I’m not saying this is going to happen tomorrow. But when the break does come, you can expect the big hedge funds to dog pile in. And if JGB’s do go down the crapper, can the yen be far behind?

Nov 05 09:28 AM

[doubleguns:]

Can our bonds be far behind? We seem to be on the exact same road. Unfortunately its the highway to hell. We really should get in the slow lane.

Nov 05 10:06 AM

[TRYKtrading:]

as usual, blah, blah, blah.


On Nov 05 09:28 AM Mad Hedge Fund Trader wrote:

> come, you can expect the big hedge funds to dog pile in. And if JGB’s > do go down the crapper, can the yen be far behind?

Nov 05 11:11 AM

[Donald Ingram:]

Other factors are to be considered besides low returns;
1/ An aging work force.
2/ A much lower savings rate.
3/ High unemployment.
4/ Collapsing export market.
5/ Diminished tax returns.
6/ Crushing social obligations.
7/ New, inexperienced government.

To put forward your reasoning as just the poor rate of return, vis a vis the low interest rate, is to ignore the above mitigating factors.

Nov 05 12:24 PM

[user225084-...:]

>>The Mainichi Shimbun (original in Japanese) reported early Thursday that Japanese Government Bonds’ (JGBs) popularity is rapidly falling among individual investors.

How did the report arrive at the conclusion made that the bonds popularity is rapidly falling??

Nov 05 12:33 PM

[Steven Towns:]

Donald, while there are of course are other factors, the bottom line is that the yield is so paltry as to dissuade Japanese individual investors who have been earning even less on cash deposits and suffering in a deflationary environment to boot. Also, don't miss the fact that the Japanese savings rate may be down, but the Japanese have a tremendous amount of accumulated savings.

On Nov 05 12:24 PM Donald Ingram wrote:

> Other factors are to be considered besides low returns;
> 1/ An aging work force.
> 2/ A much lower savings rate.
> 3/ High unemployment.
> 4/ Collapsing export market.
> 5/ Diminished tax returns.
> 6/ Crushing social obligations.
> 7/ New, inexperienced government.
>
> To put forward your reasoning as just the poor rate of return, vis
> a vis the low interest rate, is to ignore the above mitigating factors.

Nov 05 12:42 PM

[Steven Towns:]

Based on demand: "The MoF now only expects to raise Y1.3 trillion (US$14.3B) this year from individual investors, down from a prior estimate of Y2.4 trillion, and considerably lower than the record Y7.2 trillion raised in ‘05." Also, there was an anecdotal report that an unnamed large domestic financial institution canceled its plans to promote the October individual investor JGB issue and instead direct clients into one and two-year emerging economy notes.

On Nov 05 12:33 PM user225084-justme wrote:

> >>The Mainichi Shimbun (original in Japanese) reported early Thursday
> that Japanese Government Bonds’ (JGBs) popularity is rapidly falling
> among individual investors.
>
> How did the report arrive at the conclusion made that the bonds popularity
> is rapidly falling??

Nov 05 12:50 PM

[Vuke:]

Donald: It's clear. Do you mean the U.S. or Japan?

On Nov 05 12:24 PM Donald Ingram wrote:

> Other factors are to be considered besides low returns;
> 1/ An aging work force.
> 2/ A much lower savings rate.
> 3/ High unemployment.
> 4/ Collapsing export market.
> 5/ Diminished tax returns.
> 6/ Crushing social obligations.
> 7/ New, inexperienced government.

Nov 05 02:09 PM

[dieuwer:]

Local deflation should be meaningless to local Japanese investors.
So what there was deflation from 1990 - 2000? Japanese could have invested in NASDAQ stock and make a 10-fold gain.
So what there supposedly is deflation since 2000 again. Japanese could have invested in gold and commodity stocks and make a fat gain.

Nov 05 03:40 PM

[Steven Towns:]

@dieuwer: Re-read/think over my last paragraph. The point of this article is about yield, not marketing timing. Also, I'm sure you realize there was also a big tech (IT) rally in Japan, too. And believe it or not, gold has appreciated obviously in yen.

On Nov 05 03:40 PM dieuwer wrote:

> Local deflation should be meaningless to local Japanese investors.
>
> So what there was deflation from 1990 - 2000? Japanese could have
> invested in NASDAQ stock and make a 10-fold gain.
> So what there supposedly is deflation since 2000 again. Japanese
> could have invested in gold and commodity stocks and make a fat gain.

Nov 05 04:15 PM

[JudeJin:]

the japanese can save their slumping economy by opening up their turkish saunas to tourists. just a joke.

Nov 05 09:36 PM

[JudeJin:]

with gold taking up the spot light, the japanese would be too dumb to ignore the merits of gold over 0 yielding JGB. smart institutions will JGB quietly too.

Nov 05 09:44 PM

[Formyx:]

Japan is projected to have negative savings rate and current account deficit over the next 2 to 3 years. CDS trade at half the annual yield of 10 year JGBs. Vanilla swaps trade through JGBs occasionally as well ( a unique Japanese phenomenon ). The mkt knows JGBs stink and that is why it is a crowded trade. HFs have perennially shorted JGBs enticed by low rates and bled. However, the day of reckoning is near.

Nov 06 09:39 AM