Japan Sheds Treasuries for US Equities: More Miserable Timing


If you are looking for what not to do, just follow Japan and do something else, with a bit of delay perhaps.

Japanese holdings of stocks, company and agency debt exceed $1 trillion. Japan has soured on treasures and As Japan Dumps Treasuries, It's Piling Into Riskier U.S. Assets.

It’s easy to see why Japan has soured on Uncle Sam.

After all, returns on Treasuries have been lousy for years. And the sky-high costs to hedge the dollar’s ups and downs mean Japanese investors can often do better at home -- despite the minuscule yields there.

But it doesn’t mean they’ve given up on America altogether. In fact, investors from Japan have plowed record amounts into U.S. stocks, corporate bonds and agency-backed securities, pushing investments in those assets past $1 trillion for the first time ever this year. That’s a stark contrast to the big pullback from Treasuries, which has cut Japan’s holdings to a seven-year low.

“The rising hedge cost has pushed Japanese investors out of their favorite foreign product: U.S. Treasuries,” said Tetsuo Ishihara, a U.S. macro strategist at Mizuho Securities USA’s fixed-income unit. “In general, they have had to take more risk to offset that rise.”

Vanishing Yield

To understand why, consider what Treasuries actually yield for a typical Japanese investor. After taking into account the cost of currency forwards used to insulate buyers against dollar swings, 10-year yields -- currently at 2.83 percent -- effectively shrink to about 0.3 percent for yen-based investors.

Of course, that’s still higher than the yield on 10-year JGBs, which is barely above zero. But looking solely at yield levels arguably misses the point that matters most: what the trade returns after factoring in currency swings.

And this year, it hasn’t been pretty.

Japanese investors who hedged their currency risk lost 3.7 percent in 10-year Treasuries in the first half of the year, according to bond indexes compiled by Intercontinental Exchange. For those who decided not to worry about currency fluctuations? They lost 4.3 percent in yen terms as the dollar weakened against Japan’s currency. (For comparison, JGBs due in five years or more all have positive returns.)

Short Term Thinking

There's nothing like short term thinking for long term investing. And what about holding Japanese treasuries for all these years effectively yielding zero?

That's long-term thinking in a short-term world.

So here we are. Apparently there is no better time than the present to plow into riskier assets.

Compelling Case?

While the math alone makes a compelling case, stronger global growth has also coaxed Japanese investors into taking more risk, says Zach Pandl, co-head of global FX strategy at Goldman Sachs.

“The shift away from Treasuries and toward corporates and agencies over the last couple of years reflects improving market conditions and increasing risk tolerance by Japanese investors,” he said.

Please file this one in the folder labeled "Just in the nick of time, not".

Mike "Mish" Shedlock

Comments (7)
No. 1-7

One thing that happens very late in bull markets, and which signals a top, is an increase in foreign money going into the market. A second thing that happens at the top is that the Russell starts outperforming the Dow and S&P, as investors dig deeper in search of values. Year to date, the Dow is -2%, the S&P is +1%, and the Rut is +8%.


Mish you once stated that the one of the reasons the US runs a trade deficit is because of the budget deficit being so high. Japan has a trade surplus with a huge budget deficit. They also are protectionist impeding free trade and they seem to be doing fine. They can't debase their own currency no matter how hard they try. This is perplexing to me. It seems like its irrelevant what they do with their money if they lose on stocks the BOJ will print up some more and "reinvest" in the private sector to keep things going kind of like China.


Still intuitively it can't go on without something untoward happening in the long run.That being said it is already the long run in Japans case.


I see there is now only 29 basis points between 2 and 10 year treasuries and 40 basis points between 2s and 30s. If the Japanese are looking for value then shorting US banks stocks would be the sensible play, especially with the Fed looking to hike further.


We'll see Mike.

Global Economics