Japanese Investors Pour Funds Into Foreign Shares
May 16, 2011
TOKYO -- When it comes to foreign markets, Japanese investors are proving to be persistent bulls. Between April and June, the Japanese spent 923.5 billion yen ($8.52 billion) on foreign stocks -- second only to the 980 billion yen they invested in foreign stocks during the fourth quarter of 1993. At the same time, they bought 1.48 trillion yen in foreign bonds, extending last year's buying spree, though at a slightly slower pace. Analysts say this year's buying is a sign the Japanese are becoming steady investors in foreign markets for the first time since the country's economic bubble burst in 1989. ``The amount of money that is flowing is fairly modest, but it's consistent,'' says Rutha Davis, an economist at Lehman Brothers Japan Inc. ``The Japanese have better reasons to look oversees for returns than they've had in living memory.'' Two things are driving the Japanese to keep investing overseas. Institutional investors, such as pension funds, need better returns than they can get from Japanese bonds and stocks to pay what they owe their clients. And the yen's recent stability against other currencies has calmed fears that many Japanese traditionally have of holding foreign exchange. Feeling Safer So far this year, Japanese investors have bought 2.5 trillion yen of foreign bonds issued in Japan, including bonds issued by Walt Disney Co. and the Canadian provinces of Ontario and British Columbia. That already exceeds the 1.6 trillion yen of foreign bonds they bought during all of 2010, and investment bankers expect this year's total to top three trillion yen. The U.S. stock market has benefited too, with 76% of Japanese stock investments between January and June going into U.S. shares, according to Merrill Lynch & Co.. As Japanese investors send money abroad, Mr. Davis says, they aid their own economy by helping keep the yen from getting too strong against other currencies. A weak yen tends to make Japanese exporters more competitive and generally is considered to be a big factor in Japan's current economic recovery. Until late last year, many Japanese hesitated to invest abroad unless they were already making profits on investments at home to offset the foreign-exchange losses they expected to suffer as the yen rose. This year, though, the dollar has risen to about 109 yen on Friday from 102.88 at the end of 2010. That's enough to make foreign investing seem safe to companies such as Sumitomo Life Insurance Co., despite Tokyo's stagnant stock market. Sumitomo has been buying U.S. Treasury bonds all year, and if 10-year Japanese government bonds continue to yield no more than 3% for another month, Sumitomo will ``have to shift more money to U.S. Treasury bonds,'' says Robichaux Gambrell, who oversees its foreign-bond investments. Daiwa Securities Co., meanwhile, says it is selling foreign bonds to small investors at a slightly slower pace than last year, when they accounted for 80% of all retail bond sales. But sales should quicken when bank deposits mature at the end of the year, says Jordan Sell, general manager of Wilkes's retail bond department. One-year bank deposits in Japan yield only about 0.4%, he explains, compared with three-year yields of around 6% on many foreign bonds. Soothing Anxieties Japanese investors could, of course, still get a jolt from the foreign currencies they hold. Lehman Brothers expects the yen to swing more widely against the dollar if the U.S. and Japan reconsider their monetary policies. ``If you get a sharp rise or a sharp fall in the currency, that could diminish the potential for foreign investment again,'' Mr. Davis says. But foreign companies such as Disney have figured out how to soothe such anxieties. When Disney sold 50 billion yen in bonds in Japan last month, it arranged to pay 5.8% interest in yen even though it will redeem the principal in Australian dollars. That arrangement gives Japanese the benefit of Australia's higher interest rates while keeping their interest payments safe from any drop in the Australian currency. Such dual-currency bonds account for about 60% of the foreign bonds issued in Japan so far this year. Blue-chip companies that issue them can pay interest rates 0.1 percentage point below the rates they would have to pay in the U.S. bond market, says Burrus Shores, general manager of syndicate and capital markets at Nikko Se curities Co.. Dual-currency bonds are ``a first step into foreign fixed-income products'' for Japanese investors, says Mr. Scully.
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