Japanese investors have sharply reduced their holdings of Eurozone government debt, marking the fastest pace of sell-offs in over ten years. The trend highlights how rising interest rates in Japan are reshaping financial markets worldwide. According to data compiled by Goldman Sachs from Japan’s Ministry of Finance and the Bank of Japan, net sales by Japanese investors reached €41bn in the six months leading to November, as reported by The Financial Times.
This sharp divestment is fueled by rising bond yields in Japan and political instability in Europe, including the collapse of the German ruling coalition and ongoing turmoil in France, which is operating under an emergency budget law. Among Eurozone nations, French bonds saw the highest outflows, totaling €26bn during the period.
The impact of these sales is significant, further pressuring European governments that are already facing increased borrowing costs. The withdrawals also underscore a larger shift as Japanese interest rates rise after a long period of negative rates, forcing investors to reconsider their positions in global debt markets.
Alain Bokobza, head of global asset allocation at Société Générale, called the Japanese pullback a “game changer” for both Japan and global financial markets. Tomasz Wieladek, an economist at T Rowe Price, emphasized the growing risks of rapid sell-offs in the bond market, with Japanese investors having historically been a stable source of demand for European government bonds.
The withdrawal of Japanese capital comes amid increasing costs for hedging against fluctuations in the value of the yen, which have made foreign bonds less attractive. For example, despite lower hedging costs than in 2022, the yield on a 10-year Italian government bond is only slightly above Japan’s domestic 10-year yield, rendering overseas debt less appealing to Japanese investors. Regional Japanese banks have been identified as key sellers in this trend.
The shift away from foreign bonds is evident in institutions such as Norinchukin, one of Japan’s largest institutional investors, which announced plans to sell more than ¥10tn of foreign bonds this financial year. In November, Norinchukin reported a $3bn loss from its foreign bond holdings.
These developments are placing additional upward pressure on European bond yields, which have already been rising since the European Central Bank began reducing its balance sheet following its pandemic-era bond-buying program.
The changes are particularly visible in France, where Japanese outflows between June and November totaled €26bn, a sharp increase from €4bn during the same period in the previous year. Seamus Mac Gorain, head of global rates at JPMorgan Asset Management, remarked that “there is no question that for France, the buyer base has changed.”
For the past two decades, Japanese investors have been a cornerstone of the global bond market, particularly in Europe, driven by the ultra-low yields in their home market. However, as domestic returns become more attractive, the net buying of global debt by Japanese investors has significantly dwindled, from around $500bn in the previous five years to just $15bn over the past five years.
JPMorgan’s Gorain explained that “Japanese bonds were quite unattractive for domestic investors in the past, they are more attractive now,” signaling a structural shift in the market dynamics.
