A common line in the endless debate about the sustainability of Japanese government debt is that it’s only sustainable (at ~200% of GDP) because its mostly owned internally. To attract foreign investors, the detractors say, yields would need to rise, thus breaking the back of the government.
So it’s interesting that foreign ownership of Japanese Government Bonds (JGB) is on the rise.
Foreign Japanese government bond (JGB) holdings were up 11 per cent at the end of September compared with a year earlier, the Bank of Japan, the central bank, said on Friday. Both the amount and the share of the total, which rose 0.4 percentage points to 9.1 per cent, were records.
So why the rise in ownership?
Yields remain incredibly low, as you can see on this Bloomberg chart of Japanese 10-year bond yields.
[credit provider=”Bloomberg” url=”http://www.bloomberg.com/quote/GJGB10:IND/chart/”]
It’s got nothing to do with yields.
It’s all about this chart, showing over 30 years of Japanese trade balances.
[credit provider=”Tradingeconomics.com” url=”http://www.tradingeconomics.com/japan/balance-of-trade”]
Basically, Japan is going through a historic period of running trade deficits with the outside world.
When it does that, yen get shipped all over the place (to buy goods). And when yen go all around the world, those yen get parked in… Japanese Government Bonds. They come back to the government. So of course when Japan is running a large trade deficit, foreign ownership of JGB will rise.
That’s why the US, which has run a large trade deficit for years, has a record level of foreign government bond ownership. So the trend has no impact on rates, or sustainability, or global appetite for the debt. It’s just a function of trade dynamics.