By Jamie McGeever
ORLANDO, Florida (Reuters) – Japan solidified its status as the world’s largest creditor last year as the country’s net international investment position grew to a new all-time high as a share of gross domestic product.
Should Japanese investors decide to repatriate a chunk or even a fraction of their overseas equity and bond investments, the impact on global asset prices, exchange rates – and the yen in particular – could be seismic.
The key question, however, is: Why would they?
To make it an attractive proposition, substantial policy tightening from the Bank of Japan would be required to sufficiently narrow the interest rate gap with the U.S. and other major economies.
Ministry of Finance figures this week show that Japanese investors had no appetite to repatriate investments last year even as speculation over a BOJ exit from ultra-loose policy began to mount.
As long as yields on foreign bonds remain significantly above equivalent Japanese yields, repatriation flows back into Japan are unlikely to materialize.
“Japanese wealth is large and repatriation flows are powerful, but there is a second order question of whether there is appetite in the private sector to repatriate,” says Shekhar Hari Kumar, macro strategist at Exante Data.
“I think there will be a continued slow leak of Japanese investors buying foreign fixed-income assets. It’s hard to see the outflow turning around any time soon.”
ALL IN BONDS
The total value of financial assets and investments held by Japanese investors abroad at the end of last year exceeded the value of Japanese assets and investments held by foreigners to the tune of 471.3 trillion yen, MOF figures show.
That’s $3.36 trillion at Dec. 31 exchange rates and marks an increase of 51.3 trillion yen, or $366.5 billion, from a year earlier. It’s also a record 84.3% of GDP, up sharply from 76.6% a year earlier and a reminder of Japan’s muscle on the global financial stage.
A deeper dive into the MOF figures reveals that the $366.5 billion net increase in Japan’s paper wealth last year was enhanced by asset purchases, valuation changes and, more significantly, the weakness of the yen.
Exchange rate moves boosted Japan’s overall international investment position by 59.23 trillion yen, or $423 billion, and net asset buying in the broadest terms lifted it by $166.5 billion. These effects were offset by $223 billion of “other changes” such as mark-to-market changes in asset prices.
Of the 86.1 trillion yen or $615 billion increase in the value of Japan’s portfolio investments abroad last year, around 40% was due to exchange rate moves, almost a third a result of “other changes”, and only 20% from actual asset purchases.
The near $300 billion increase in Japanese holdings of foreign debt securities was evenly accounted for by actual buying and FX fluctuations, while the $320 billion increase in equity holdings was entirely a result of FX and “other” changes.
That meant Japanese investors actually sold $16 billion of foreign stocks, which analysts say was probably to offset the rise in equity prices and meet rebalancing requirements.
RIPPLE EFFECTS
The figures underline just how much the yen’s depreciation has increased profits for Japanese investors and financial institutions holding overseas investments, and the value of these holdings.
The yen fell 7% against the dollar last year, 12% the year before that, and is down a further 10% so far this year to an all-time low 160.00 per dollar. The yen’s broad effective exchange rate is the weakest it has been since the era of free-floating exchange rates was established in the early 1970s.
Any Japanese investor holding overseas assets has benefited hugely in recent years from exchange rate trends, the widening interest rate gap between Japan and the rest of the world, and latterly, the AI-fueled boom on Wall Street.
Exante Data’s Hari Kumar estimates that 70% to 80% of the boost to Japan’s international investment position over the last two years has come from the yen’s depreciation and mark-to-market changes in asset prices.
The exchange rate, in particular, has boosted Japan’s paper wealth. As Deutsche Bank’s George Saravelos noted recently, the government pension investment fund (GPIF) – the world’s largest public pension fund – has roughly made more profit over the last two years than the last 20 years combined.
“Exchange rate fluctuations and their valuation effects can also affect the lives of those who may not appear to be interested in FX investments,” Hiroyuki Ito, professor of economics at Portland State University, wrote in a paper last year on the yen and Japan’s international investment position.
Some Japanese investors may be tempted to turn that paper profit overseas into realized profit at home. But with the yen still anchored at historic lows and Japanese yields still lagging well behind their global peers, their record wealth is likely to remain offshore.
(The opinions expressed here are those of the author, a columnist for Reuters.)
(By Jamie McGeever; Editing by Hugh Lawson)
