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Japanese Home Bias Maintained On Steep JGB Curve, Vol. & FX-Hedge Costs


While it is a topic we have flagged on many occasions in recent months, it is worth remembering that the steepness of the 10-/30-Year JGB curve (albeit owing to the BoJ’s YCC policy, which some are speculating will be altered in ’23, although that is a topic for another time), alongside ongoing market vol. and elevated FX hedging costs, have facilitated a home bias for the Japanese life insurer and pension fund cohort.

  • This has resulted in several rounds of record monthly net foreign bond sales on the part of Japanese insurers during ’22, most recently in November, when they recorded a net sale of ~Y1.93tn of offshore bonds (this represented the ninth consecutive month of net sales).
  • The second figure highlights the yield pickup that 10- to 40-Year JGBs provides vs. the major 10-Year core global FI alternatives (adjusted for rolling 3-month FX hedging costs from the perspective of a Japanese investor).
  • There will be a point whereby offshore paper becomes a little more attractive for this investor cohort, but we haven’t reached that point yet. This week’s central bank decisions are (of course) keenly awaited.

Fig. 1: 10-/30-Year JGB Yield Spread Vs. Major Global Counterparts (bp)

Source: MNI - Market News/Bloomberg

Fig. 2: 10- To 40-Year JGB Yields Vs. The Major 10-Year Core Global FI Alternatives, FX-Hedged From The Perspective Of A Japanese Investor (%)

Source: MNI - Market News/Bloomberg

MNI London Bureau | +44 0203-865-3809 |
MNI London Bureau | +44 0203-865-3809 |

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