Japan's Net Sales of Foreign Debt Reaches Record

AUGUST 28, 2008

Japan's Net Sales of Foreign Debt Reaches Record

Although one robin does not make a spring, the increased reluctance of Japanese retail and institutional investors to hold GSE debt is worrisome. Bloomberg reports that Japanese retail and institutional investors are unloading foreign debt due to currency volatility and are particularly leery of Fannie and Freddie securities.

Admittedly, as Brad Setser has pointed out repeatedly, private foreign investors have increasingly become a marginal factor in the funding of the US current account deficit. The buyers are almost entirely central banks and to a lesser degree, sovereign wealth funds. Setsernoted earlier in the week that central banks 

..aren't quite as keen on Agencies as they used to be. But central banks still are buying a lot of Treasuries.

So the momentary backing off of Japanese investors in and of itself may not be as big a cause for concern as it appears to be. But there is a second-order question: if the populace of a country comes to regard US credits, public and private, as less than desirable, continuing large central bank purchases will become increasingly controversial. 

Now China may seem immune to that sort of pressure, but recall even they have taken a lot of heat for the Blackstone investment and actually seem (as best I can judge at this remove) more than a tad embarrassed.

Skeptical CPA points to a similar line of thinking:the return on offer for US bonds is inadequate. quoting Steve Hanke at Forbes (August 11, no online source):

In short, the dollar rules, to the great benefit of the U.S. Could it lose its dominion? It could. ... For real rates, compare the nominal return on short-term Trasury bills (less than 1.5%) with the rise in the consumer price index over the last year (5%). Someone sitting on cash in the form of T bills is seeing his wealth shrink (and this is before income tax is subtracted). Neither U.S. savers nor foreign central banks are willing to undertake this sacrifice forever. ... Foreign central banks purchase roughly 80% of all the new debt issued by the U.S. government. ... By my calculation, approximately 55% of the increase in corn since 2001 can be accounted for by the dollar's decline. ... By denying a direct link between the dollar and commodity prices, the Fed is signalling that it wants room to move interest rates and the dollar down

Now to the story on Japan from Bloomberg:

Japanese investors made the biggest weekly net sales of overseas bonds since at least 2001 on currency swings and concern the U.S. housing slump will worsen.

Sales of overseas securities exceeded purchases by 1.42 trillion yen ($13 billion) in the week ended Aug. 23, according to figures based on reports from designated major investors released by the Ministry of Finance in Tokyo. JPMorgan Asset Management Japan Ltd. said last week it was reducing its holdings of debt issued by Fannie Mae and Freddie Mac.

``Japanese investors have been constant sellers of agency debt,'' said Hideo Shimomura, who oversees the equivalent of $4 billion as a chief fund manager at Mitsubishi UFJ Asset Management Co. ``Major Japanese institutional investors are likely to have sold agency bonds'' in the week ended Aug. 23....

``Although Fannie and Freddie are being aided by the government, there still is no guarantee on their debt, so it is difficult to hold it,'' said Daisuke Uno, chief bond and currency strategist at Sumitomo Mitsui Banking Corp. in Tokyo. ``Without a guarantee, nobody will do anything as it's too risky, so they sold the bonds.''

Local investors may also have sold overseas bonds due to increased volatility in major currencies, said Tsutomu Komiya, an investment manager in Tokyo at Daiwa Asset Management Co.