Stonehage warns of Japan’s ticking time bomb

Investors attracted to Japanese Government Bonds (JGBs) should think twice before investing due to the risk of a price deterioration in the coming years, warns the Stonehage Group, the multi-family office for ultra-high-net-worth families and entrepreneurs.

Japan’s debt-to-GDP ratio at 220%, is almost double that of Italy. Yet the Japanese bond market has not behaved in the same way as in Europe, as domestic investors continue to prop up the country’s bond market.

Anticipation among investors of a transition to a more externally-funded system has prompted many investors over the years to consider “shorting” JGBs, yet prices have continued to rise and yields have fallen to very low levels.

Ronnie Armist, executive director at Stonehage Investment Partners (SIP), said: “High levels of domestic household and corporate savings have sustained the issuance of JGBs in recent years. However, as the country’s population ages and continues to draw on its $1.37 trillion public pension fund, the Japanese government will become more and more dependent on external investors (or the Bank of Japan) to support its bond markets.

“This may result in a rise in yields and a fall in prices as investors question the long-term real value of bonds issued by a country with such a high debt-GDP position. Given the current yield of 1% on 10-year Japanese Government Bonds, we don’t believe this represents a worthwhile investment today.”

The warning comes as the Yen was put under increasing pressure last week: policy makers pushed for the central bank to ease monetary restrictions after the U.S. Federal Reserve’s stimulus measures nudged up the Yen against the dollar.

Kirsten Giddey, director, SIP added: “We hold limited exposure to the Yen within our client portfolios. If required, the Japanese central bank could also elect to inflate away its debt burden and this would be a negative for the currency. We are not recommending outright short positions either on Yen or on Japanese Government Bonds as the timing of this outcome is extremely uncertain. However, we are avoiding both of these markets and recommend investors do the same.”


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