Unraveling Fortunes: The $4 Trillion Japanese Carry Trade Unwinds, Stirring Market Turbulence
Last Updated: Oct 02, 2024 | 11:21 PM IST
By Ruth Carson, Masaki Kondo, and Winnie Hsu
Japanese Investors Shift Focus Back Home as Rates Rise
Japanese investors are redirecting their focus back to domestic assets after decades of favoring overseas investments. In the first eight months of this year, they acquired a net ¥28 trillion ($192 billion) in Japanese government bonds (JGBs), marking the largest purchase in over 14 years. Concurrently, they halved their purchases of foreign bonds to ¥7.7 trillion and invested less than ¥1 trillion in overseas equities.
Arif Husain, Head of Fixed Income at T. Rowe Price, predicts this trend will persist over the next five to ten years. “There will be a sustained, gradual but massive flow of capital back into Japan from abroad,” he stated.
With Japan’s investors holding $4.4 trillion abroad—more than India’s economy—the potential repatriation of funds could significantly impact global markets. Japanese investors have historically engaged in a form of carry trade, leveraging ultra-low domestic interest rates to invest abroad.
The extent of capital retraction will depend on future Japanese interest rate trends. Though the Bank of Japan (BOJ) intends to be cautious with rate hikes, a stronger yen and higher bond yields are expected. Yields on 30-year JGBs have already risen by about 40 basis points this year, approaching levels considered attractive by major insurers like Dai-ichi Life.
Japan’s large investors, including Japan Post Insurance Co. and Norinchukin Bank, are adjusting their portfolios, with some scaling back on foreign holdings in favor of domestic assets. The latter bank has reduced its foreign investments by ¥10 trillion due to increasing funding costs and losses.
This trend towards repatriation could potentially cause market upheaval akin to the disruptions of Aug. 5, 2024, when fear of higher Japanese rates and a slowing U.S. economy led to a massive sell-off. The BOJ’s response was to consider market stability in its future rate decisions.
While Japan’s interest rates remain substantially lower than those in the U.S. and Europe, making foreign investments still appealing, the shift back to domestic bonds is expected to continue. The Government Pension Investment Fund (GPIF), one of the world’s largest, still maintains considerable foreign holdings to balance domestic losses.
The August market turmoil demonstrated the potential scale of repatriation, with JPMorgan Chase estimating up to three-quarters of the global carry trade being unwound. As Japan’s interest rate environment evolves, the incentives for investors to bring funds back will increase.
“Investors everywhere are underestimating the risk of big repatriation flows in the long run,” said Shoki Omori of Mizuho Securities, signaling a noteworthy trend that could reshape future investment landscapes.
(Updates with yen in 8th paragraph)
First Published: Oct 02, 2024 | 11:20 PM IST
Original Story https://www.business-standard.com/markets/news/japanese-investors-4-trillion-carry-trade-begins-to-slowly-unwind-124100200979_1.html
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