As Japan's ultra-loose monetary policy begins to tighten, the interest rate gap between Japan and other countries is narrowing, reducing the allure of "carry trades." Japanese investors' fervor for overseas assets is diminishing, with the purchase of foreign bonds by Japanese investors decreasing by nearly half in the first eight months of this year.
Recent data reveals that Japanese investors have net purchased up to 28 trillion yen (approximately $192 billion) of Japanese government bonds in this period, marking the highest level in at least 14 years. Conversely, their purchase of foreign bonds has drastically reduced to 7.7 trillion yen, and their purchase of overseas stocks fell below 1 trillion yen.
This shift could indicate the start of a new "supercycle." According to Arif Husain, head of fixed income at T. Rowe Price, the capital that Japanese investors placed abroad is expected to gradually but significantly flow back to Japan over time.
Given this backdrop, market perception of central bank policies is particularly sensitive. Bank of Japan Governor Kazuo Ueda has repeatedly suggested that policy normalization will proceed gradually without haste. The new Prime Minister called for maintaining loose monetary policies, emphasizing that escaping deflation should be Japan's top economic priority.
The attractiveness of domestic assets is increasing, causing more investors to consider redirecting funds back to the Japanese market. Over the past few years, Japanese investors profited from "carry trades" by utilizing the ultra-low interest rates domestically to fund overseas asset purchases. Japan's overseas investment reached $4.4 trillion, surpassing the size of India's economy.
However, with the Bank of Japan's interest rate hike, raising the policy rate from 0% to around 0.25%, the yield on benchmark 30-year Japanese government bonds has risen above 2%. As the allure of domestic assets grows, more investors are inclined to repatriate funds to the Japanese market.
T&D Asset Management Co. noted that a 30-year government bond yield exceeding 2.5% might be a crucial point for fund repatriation. Dai-ichi Life Insurance Company remarked in April that yields above 2% would be comparatively attractive.
Japan Post Insurance Co., although it continues to invest overseas, noted through its Senior General Manager of Global Credit Investment, Masahide Komatsu, that investing in yen-denominated assets has become easier, and they aim to achieve diversified investments.
The trend of capital repatriation to Japan may persist. Japanese investors, who have been significant players in overseas markets, are beginning to reassess risks and returns amid global market volatility. The August 5 market crash, which saw the Nikkei 225 index suffer its largest drop since 1987, exemplified this reconsideration.
Moving forward, as the Bank of Japan continues to adjust its policies and global economic conditions evolve, the appeal of overseas assets is likely to diminish, and the trend of repatriation could continue. JPMorgan estimates that up to three-quarters of carry trades have been unwound. Saxo Bank global market strategist Charu Chanana observed that August saw a noticeable return of funds and suggested that the Federal Reserve’s commitment to a "soft landing" decreases the chances of a sudden economic downturn, potentially moderating the pace of future fund repatriation.
Mizuho Securities chief strategist in Tokyo, Shoki Omori, warned that global investors have underestimated the risks of large-scale long-term fund repatriation. He advised keeping a close eye on the ongoing trend.
