The Return of Japanese Cash to Australia Will Squeeze Australian Bonds

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Japanese investors have been steadily leaving Australia’s $600 billion bond market, and the trend is expected to accelerate in the coming months. This is due to an increase in risk associated with any potential changes in policy by Japan’s central bank, The Bank of Japan (BOJ).

Japanese Investors own Aussie Debt

According to analysts, Japanese investors have been a significant contributor to the Australian bond market for years, owning between 7% and 15% of its sovereign and semi-sovereign debt. 

This is significantly higher than their 4.7% ownership of the U.S. Treasury market, indicating the relative attractiveness of Australian bonds and economic conditions Down Under.

However, this investment has been declining in recent months as Japanese investors move their money back home amid increasing concerns about potential changes to BOJ policy.

Andrew Lilley, chief interest rates strategist at investment bank Barrenjoey in Sydney, said, “People have concluded Australian government bonds will underperform because Japan is seen as more of an outsized buyer of Australian bonds than they are of euro area or U.S. or UK bonds.”

Bond dealers have warned that the situation has attracted several short-sellers to the Australian bond market as speculation swirls that Japan will ultimately start to exit its ultra-easy monetary policy and let the market set bond yields.

This puts pressure on Australian bonds and could mean significant losses for investors relying on the BOJ’s steady buying of debt securities.

Although some believe that the BOJ’s purchases will likely decline slowly over time, others suggest it could be more abrupt due to increasing economic uncertainty worldwide.

The shift away from ultra-easy monetary policy also means that interest rates may start to rise in Australia, further squeezing bond yields for investors who had previously relied on low borrowing costs.

Analysts fear that this trend of Japanese investors leaving Australia’s bond market may spread beyond their holdings, leading other global investors to do the same.

In addition, analysts point out that even if there is an exodus from Australia’s bond market in response to any BOJ moves, it may not necessarily be anywhere near as large or sudden as some fear.

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