Foreign investors snap up Japanese government bonds as yields surge – Financial Times

Report on Foreign Investment in Japanese Government Bonds and Implications for Sustainable Development

A significant shift in the Japanese Government Bond (JGB) market has been observed, with foreign investors increasing their holdings of long-dated bonds at a record pace. This trend has profound implications for Japan’s fiscal policy, economic stability, and its alignment with the Sustainable Development Goals (SDGs), particularly those concerning economic growth, strong institutions, and global partnerships.

Analysis of Investment Inflow

Data indicates a substantial influx of foreign capital into the long-dated JGB market, driven by rising yields and favorable hedging conditions. This development is reshaping the investor landscape, traditionally dominated by domestic institutions.

Key Investment Metrics

1. Record Investment Volume: Foreign investors acquired a net ¥11.3 trillion ($71.8 billion) in JGBs with maturities exceeding 10 years by the end of October, the highest figure since records began in 2004.
2. Surging Yields: The primary attraction for investors is the sharp increase in bond yields. For instance, yields on 30-year JGBs have risen from 1.6% to a high of 3.41%.
3. Hedging Advantages: Currency hedging provides an additional return for foreign investors, with a sterling-hedged investor potentially achieving yields of approximately 6.5% to 7% on 30-year debt.

Shift in Domestic Demand and Its Impact on Sustainable Financing

The surge in foreign participation coincides with a structural decline in demand from traditional domestic buyers. This shift affects the stability of financing for national objectives, including infrastructure and social programs central to SDG 9 (Industry, Innovation and Infrastructure) and SDG 10 (Reduced Inequalities).

Factors Reducing Domestic Demand

• Life Insurers: Having met regulatory requirements to match asset and liability durations, life insurers have reduced their need to accumulate long-dated bonds.
• Government Savings Schemes: The introduction of the Nippon Individual Savings Account (NISA) scheme in 2024 has encouraged retail investors to shift savings from life insurance policies to the stock market.
• Demographic Changes: A shrinking life expectancy among the baby boomer generation has structurally lowered the demand for long-term assets held by life insurers.
• Central Bank Policy: The Bank of Japan (BoJ) has begun tapering its purchases of bonds, including those with maturities between 10 and 25 years, reducing a major source of domestic demand.

Implications for Governance and the Sustainable Development Goals (SDGs)

The growing presence of international investors introduces a new layer of market discipline on Japan’s fiscal management, directly influencing the country’s capacity to achieve key SDGs.

Fiscal Discipline and Institutional Strength (SDG 16 & SDG 8)

Increased foreign participation enhances scrutiny of Japan’s fiscal policy. International investors are typically more sensitive to deficit spending and fiscal irresponsibility than domestic buyers. This external pressure can foster greater accountability and transparency in public finance, strengthening national institutions as outlined in SDG 16 (Peace, Justice and Strong Institutions). A more disciplined fiscal approach is fundamental to ensuring long-term macroeconomic stability and achieving SDG 8 (Decent Work and Economic Growth).

Global Financial Integration and Partnerships (SDG 17)

The integration of the JGB market into the global financial system exemplifies SDG 17 (Partnerships for the Goals). As Japan becomes a more viable destination for international bond investors, it contributes to the global flow of capital. This interconnectedness necessitates robust financial systems and highlights the role of international cooperation in maintaining global economic stability. A better-functioning JGB market can attract capital seeking stability, potentially influencing global financial dynamics.

Analysis of Sustainable Development Goals in the Article

1. Which SDGs are addressed or connected to the issues highlighted in the article?

• SDG 8: Decent Work and Economic Growth

  The article’s focus on the functioning of the Japanese government bond (JGB) market, foreign investment flows, and the stability of financial markets directly relates to fostering a stable macroeconomic environment, which is a prerequisite for sustainable economic growth.

• SDG 16: Peace, Justice and Strong Institutions

  The article touches upon the role and actions of public institutions, such as the Bank of Japan (BoJ) and the Ministry of Finance (MoF), in managing the economy and financial markets. It also highlights how increased foreign participation can enhance the accountability of government fiscal policy.

• SDG 17: Partnerships for the Goals

  The core theme of the article is the increasing international financial partnership, demonstrated by foreign investors’ significant purchases of Japanese government debt. It discusses the interconnectedness of global financial markets and how actions in one major economy can impact others.

2. What specific targets under those SDGs can be identified based on the article’s content?

1. Target 8.10: Strengthen the capacity of domestic financial institutions to encourage and expand access to banking, insurance and financial services for all.

   The article discusses the changing behavior and capacity of domestic financial institutions, including life insurers and regional banks. It describes how factors like regulatory changes and the NISA scheme are affecting their investment strategies and, consequently, the stability and composition of the JGB market.

2. Target 16.6: Develop effective, accountable and transparent institutions at all levels.

   This target is relevant because the article explicitly states that a consequence of rising foreign investment is increased scrutiny of government policy. It notes, “International investors are much more easily unnerved by deficit spending increases or general fiscal irresponsibility,” suggesting that this external pressure will make the government “more constrained,” thereby fostering greater fiscal accountability.

3. Target 17.13: Enhance global macroeconomic stability, including through policy coordination and policy coherence.

   The article directly addresses global macroeconomic stability by describing the large-scale flow of international capital into Japan’s bond market. It concludes by warning that “The rise of Japan as a plausible destination for international bond investors could be the next trigger of a big stress episode in global long-dated yields,” highlighting the deep interconnectedness of global financial systems.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

• Implied Indicator for Target 8.10: Volume of foreign investment in government securities.

  The article provides a precise figure: “foreign investors bought a net ¥11.3tn ($71.8bn) of JGBs with a maturity of more than 10 years this year to the end of October.” This figure serves as a direct indicator of foreign participation and confidence in the domestic financial market.

• Implied Indicator for Target 8.10: Government bond yields.

  The article extensively uses bond yields as a measure of market conditions and investor sentiment. For example, it states that “Yields on 30-year JGBs have soared from 1.6 per cent at the start of last year to touch a record high of 3.41 per cent.” These yields are a key indicator of the health and stability of the financial system.

• Implied Indicator for Target 16.6: Government fiscal policy decisions and deficit levels.

  While not providing a specific number, the article implies that metrics such as “deficit spending increases or general fiscal irresponsibility” will be key indicators watched by international investors. The scrutiny of these metrics is a measure of institutional accountability.

• Implied Indicator for Target 17.13: Cross-border portfolio investment flows.

  The net purchase of ¥11.3tn in JGBs by foreign investors is a direct measurement of cross-border financial flows, which is a core component of tracking global financial interconnectedness and stability.

4. Summary Table of SDGs, Targets, and Indicators

Source: ft.com