Overseas investors snapped up Japanese debt at a record pace in a week, a trend that will likely endure as interest rates the country stay stable and the financial turmoil in the US and Europe shakes investor confidence.

Overseas investors purchased ￥4.096 trillion of long-term Japanese government and corporate bonds, which will mature in more than a year on a net basis, in the week ended March 18, more than any week since tracking began in 2005, according to data from Japan's Ministry of Finance released March 24. The rush to buy those bonds reversed the previous three consecutive weeks, when overseas investors were net sellers.

Unless the Bank of Japan (BOJ) reverses its monetary-easing policy, "overseas investors will likely try to hold on to their investments and may not sell the bonds aggressively," said Takahide Kiuchi, executive economist at Nomura Research Institute.

Yen bonds appear to have become a safe harbor for overseas and local investors that have been spooked by the collapse of Silicon Valley Bank and Signature Bank and the write-down of the additional Tier 1 capital instruments of Credit Suisse Group AG. The developments sparked fears of an abrupt change in monetary policy in the US and Europe. In contrast, the Japanese central bank is expected to keep its loose monetary policy even after incoming governor Kazuo Ueda takes charge in April.

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Hold steady

Ueda has said in public comments that the BOJ should maintain its current monetary policy until Japan achieves the 2% inflation target constantly. The BOJ held policy steady at its previous meeting on March 10, the week before overseas investors pivoted toward yen bonds. The Japanese yen has bounced back after hitting a record low of 150.14 in October 2022.

Investors are seeking to avoid losses that led to the failure of Silicon Valley Bank, after the lender had to liquidate its positions in instruments considered safe, such as US Treasurys, to repay investors when rising interest rates depressed bond prices.

Japanese bonds were an appealing option to overseas investors due to a hedging cost advantage from the gap between US and Japanese interest rates, said Makoto Kikuchi, chief executive of Myojo Asset Management. Even though the returns on these bonds are not so attractive for the investors, "they have closed their short positions and bought back Japanese bonds," Kikuchi said.

Another reason could be a hike announced by the BOJ in lending fees for certain Japanese government bonds, which makes it less attractive for overseas investors to short Japanese debt, an official at the Ministry of Finance told S&P Global Market Intelligence on condition of anonymity.

The official said the probable reason for the higher interest among overseas investors in Japanese bonds could be the relative stability of Japan's monetary policy and the turmoil in the global financial markets.

As of March 28, US$1 was equivalent to ¥130.98