Despite the recent reversal of expected flows to EU bonds from Japans unprecedented monetary easing, developments in Tokyo might yet lead to big inflows to Europe from Japanese institutional buyers. This, according to Kevin Gaynor, global head of asset allocation strategy at Nomura, is because of the recent decision by Japans $1 trillion Government Pension Investment Fund (GPIF), the worlds largest public pension fund, to tweak its asset allocation, increasing allocations to both foreign stocks and foreign bonds.
The move was made under pressure from prime minister Shinzo Abe in an attempt to quell the recent volatility in the Nikkei following the introduction of unprecedented monetary easing in April.
"The government pension fund announced a change to its allocation recently at the margin more into equity and foreign debt," Gaynor explains. "It wasnt huge, but the message is clear. Japanese pension funds are therefore going to be buying more EU bonds, US treasuries, and emerging markets. This will be meaningful for Europe."
|Kevin Gaynor, global head of asset allocation strategy at Nomura|
The recent volatility in the Japanese government bond market might also act as a catalyst for inflows. The yield on the benchmark 10-year bond fell to a record low of 0.315% following the Bank of Japans announcement of its new monetary policy in April, but by May 23 it had risen to 1%. In June it was trading at around 0.8%.
"The volatility in JGBs has spooked investors," Gaynor tells Euromoney. "It has led to a lot of losses, which has made investors in Japan nervous. There have been various broker meetings with the BoJ and dealing desks the BoJ cant ask the banks to get behind this if they are losing money." Japanese banks are certainly under risk management pressure from their losses on JGBs, and appetite for duration has fallen. Many investors are consequently switching out of long-duration JGBs for shorter-duration bonds in Europe.