December 21, 2012 7:39 am

Foreign holdings of JGBs hit record

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Foreign ownership of Japanese government bonds has risen to a record Y86tn ($1tn), or just over 9 per cent of the total outstanding, underscoring the view among crisis-rattled investors that the country’s relative stability outweighs the risks posed by its vast public debt.

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.

Increasing reliance on foreigners for funding could eventually pose problems for Japan, analysts have said. The fact that most of Japan’s bonds are in the hands of local banks, insurance companies and pension funds is seen as one reason the country has managed to avoid a crisis despite a public debt that is now more than twice the size of annual economic output.

Japan’s dependence on outsiders remains light by the standards of other developed economies. At the end of 2011, 45 per cent of US Treasury bonds were owned by foreigners, while the comparable figure for UK gilts was 32 per cent.

The BoJ’s own holdings of Japanese government debt have also risen to an unprecedented level, the result of a bond-buying programme that has increased in scale as the central bank has come under heavier pressure to do more to reinvigorate the economy, which has dipped into recession, and end Japan’s persistent deflation.

The BoJ held Y105tn of government bonds at the end of September, or 11.1 per cent of the total. Overall, Japan’s government debt climbed 3 per cent compared with a year earlier to Y948tn.

Other central banks have also expanded their balance sheets radically since the onset of the global financial crisis, and the BoJ’s bond holdings are set to expand further.

On Thursday, the bank stepped up its monetary easing programme with a Y10tn increase in planned asset purchases. It also signalled that it could adopt a higher inflation goal, as requested by Shinzo Abe, the incoming prime minister.

Markets have shown a high tolerance for Japan’s huge debt: the country’s 10-year bonds yield an ultra-low 0.77 per cent. Even those low returns have been enough to attract more foreign investors at a time of economic uncertainty and the debt crisis in Europe.

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