The Bank of Japan (BOJ) is considering making some big changes in how it handles money, but experts don’t think these changes will affect the trillions of yen Japanese investors have put into global markets much. Even though the economy seems to be getting better and people are talking about the BOJ fixing the long-time problem of prices going down (deflation), experts say just adjusting short-term rates might not be enough to change the huge amount of money Japanese investors have put overseas, which is around $3 trillion.
The BOJ might change that policy as soon as this week, as reported by Reuters. Rising wages and other business activity suggest stagnation is over, meaning little need for the BOJ to continue to keep short-term rates negative. The anticipation of improved economic conditions has drawn foreign capital into Japanese equities and driven yen bond yields higher.
Japanese investors are looking for ways to make more money than they can at home, where interest rates are almost at zero. So, they’ve been investing in bonds and trading foreign money. The hope for better times has brought money from other countries into Japanese stocks and made yen bond profits higher. But now people are also looking at the $2.4 trillion of foreign debt owned by big Japanese financial companies like insurance firms, pension funds, banks, and trust firms, wondering if that money will come back home.
But these holdings reportedly earn yen investors upwards of 5%, so investors will barely react if the BOJ raises its rates by 10 or 20 basis points, analysts say. “I honestly don’t think it will have a big impact on flows,” says Alex Etra, a senior strategist at analytics firm Exante Data.
Ministry of Finance data from December revealed that Japan’s foreign portfolio investments totaled 628.45 trillion yen ($4.2 trillion). Over half of these investments were in interest rate-sensitive debt assets, mostly of a long-term nature.
It’s pretty complicated when you look at how different big investors in Japan handle their money. Pension funds usually don’t protect their foreign bond investments from changes in currency values because they make good money when they convert it back to yen. But banks and insurance companies usually do protect themselves from currency changes.
There’s also talk about bringing money back to Japan, but that depends on how much money people can make from Japanese government bonds (JGBs). Jin Moteki from Nomura thinks a lot of money could come back if JGB yields get to certain levels, maybe around 45 trillion yen.
“In our view, the potential repatriation that might be triggered by the end of YCC is likely to be around 45 trillion yen, at a maximum. We also expect Japanese life insurance companies to become potential main players of the repatriation,” Moteki was reported to have said..
But changing how the BOJ handles money doesn’t just affect bonds. It could also cause some problems with currency trades, where the yen is usually used to borrow money and then traded for other currencies. If the rates between the yen and other currencies change, it could cause some trouble in the markets.
While these trades can be highly profitable, they are also very sensitive to even small changes in interest and exchange rates. In December, a 3-month dollar-yen carry trade yielded a 7% annualized return, but that figure has since dropped to 5% due to increases in both the yen and Japanese yields.
