I titled this as a tongue-in-cheek response to FT Alphaville’s recent post about Japan. But the relative lack of activity with Japanese govies is not to be ignored.
The reason? I posted this as my “Wordless Wednesday” post (wordless posts I do when I’m too preoccupied with other things to write what I normally write):
Needless to say, they have a lot of debt to roll. Based on a quick calculation, that’s $2.3Tn that rolls this year. The interest burden isn’t great, but they’ve had near zero rates on Japanese govies for decades now.
Now one huge mitigating factor the Japanese have that other countries don’t is a counter-intuitive one: 95% of those bonds are in domestic hands. According to this article from the Financial Times, the biggest buyers of Japanese government bonds are domestic banks, domestic government pension funds (some of which have mandates for nearly 2/3 of their assets to be tied up in government bonds), and the Japanese Postal System which has both a bank and an insurance company. The Japanese Post entities held 29 percent of the outstanding Japanese bonds at one point, but that’s down to 28 percent or so now. The point I want to make is this isn’t Greece or the rest Europe for that matter. Basically, it’s their institutional investor base that insulates the bonds from market volatility. They say “no man is an island” but the Japanese are pretty close in the way they’ve closed themselves off from an investing standpoint, and to some degree their economy as a whole is closed off, too. Funny to say that, knowing how export driven they are, but it’s not a very open society and culture. But for kicks and grins, I’m posting the ’08 Operations Review for the Government Pension Investment Fund here so you get a sense of how concentrated these institutions’ holdings of government debt are:
But they have some issues. Further along in the same FT article, they highlighted the foundational issue: ultra-low yields/rates of return. There are two serious issues the ultra-low yields presents. For one, ultra-low yields are, well, ultra-low. Let’s take a look at the Japanese yield curve:
2.5 %? For 30 years? That’s a long time for you to stay content with what amounts to being peanuts from a yield perspective. I don’t think I could. But then again, nobody is putting a gun to my head to make me buy them, either. Some of those Japanese pension plans have to buy them as part of their mandate to keep a certain percentage tied up in Japanese bonds. So they don’t have a choice.
But pension funds also have to deal with another issue: outflows. They are pensions after all, paying out defined cash amounts to beneficiaries after they’ve fulfilled years of service requirements, etc. to get it. The country is getting older, the birth rate is abysmal, and they have the one of the longest life expectancies on Earth. But don’t take my word for it, look up Japan from the CIA Factbook, which is a great source for info.
For a pension fund manager, this is a demographic nightmare. Long life expectancies lead to long cash payouts. More people getting older means more to pay out at each payout. The lack of younger workers means funds aren’t coming in for the pension fund manager to invest, which implies the fund is falling behind is underfunded. Because people age faster than money accrues interest.
But back to the FT article, these dynamics are why the Japanese government has been going on roadshows to Western Europe and other places. To get investors. In fact, they’ve been doing the roadshow thing since ’06, trying to get other investors to purchase their bonds and maintain those low rates.
But it’s a double-edged sword. The other investors will come if they can get the yield, but the government isn’t going to price in higher interest costs for themselves.
The bigger issue of course is now the Japanese will be relying more on outside investors that won’t behave like the domestic institutional investors there. Which means the yield curve will be exposed to more volatility in that case.
But that foreign money won’t solve this…