Foreign investors have become bigger holders of Japanese government bonds (JGBs) than Japanese banks for the first time on record, latest data showed, highlighting their increasing influence in the 1,100 trillion yen ($9.70 trillion) market. Data released by the Bank of Japan on Wednesday showed that foreign investors' JGB holdings excluding short-term bills increased to 6.1 percent in the July-September quarter from 5.9 percent in the previous three months.
Holdings by Japanese banks slipped to 5.9 percent in July-September from the previous quarter's 6.9 percent. This is the first time since late 1997, when the BoJ began keeping such records, that foreign investors have become bigger holders of JGBs than domestic banks.
"Foreigners traditionally stuck to short term debt but the data show that they have extended the maturities of their JGB holdings," said Katsutoshi Inadome, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo. Foreigners can buy JGBs, then exchange the same amount of yen into dollars, and earn more than they would get from US debt of the same maturity. This is possible due to the high demand for dollars from Japanese investors, who are willing to pay a premium to borrow greenbacks.
Low yielding JGBs have thus turned into relatively attractive vehicles of investment using this technique called basis swaps. "Foreigners' larger JGB buying shows that their bond investment using basis swaps is no longer being confined to the short-term maturities," Inadome said.
In contrast, Japanese banks' JGB holdings have steadily declined with large portions of the JGB yield curve yielding below zero under the BoJ's negative interest rate policy.
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