March 26, 2014 4:16 am JST

Japanese investment in foreign securities hit new high in 2013

TOKYO -- The value of outstanding Japanese investment in foreign securities rose 18% to reach a record 478 trillion yen ($4.63 trillion) at the end of last year, Bank of Japan data released Tuesday shows.

     Institutional and retail investors alike took their funds abroad in light of the yen's softening and low interest rates at home. At the same time, anticipation that Japan may break free from years of deflation has prompted a resurgence in foreign capital inflows as well.

     Still, caution down the road is warranted by such factors as economic uncertainty in emerging markets and a letup in the pace of yen depreciation.

     The value of Japanese investment in overseas securities rose 71 trillion yen -- the largest margin of increase ever. Individual and institutional investors bolstered their portfolios of overseas stocks and bonds, while the softer Japanese currency also pushed up the value of such investments in yen terms.

     Investment trusts are the primary channel through which retail investors send their money abroad, as many high-yield trust products contain foreign stocks and bonds.

     Fidelity Investments Japan saw the net worth of its US High Yield Fund, which contains low-rated  American corporate bonds, double to exceed 1 trillion yen.

     Overall, Japanese trusts' outstanding investment in foreign securities increased 16% from the end of 2012 to reach a record 66 trillion yen, besting the previous all-time high of 64 trillion yen seen at the end of 2007.

     While many Japanese government bonds issued in the mid-2000s reached maturity, investors have not been putting all of those funds back into JGBs.

     "Money is becoming more likely to move into investment funds, because bond interest rates have been low as of late," an SMBC Nikko Securities official says.

     Some market watchers expect such flows to grow in 2014 owing to the January introduction of the Nippon Individual Savings Account program. Under NISA, capital gains and dividends from an annual investment of up to 1 million yen are not taxed.

     There has also been movement among financial institutions to invest in foreign bonds, as JGBs are offering yields of only about 0.5% to 0.7%.

     "We increased our outlays of Treasurys last year in order to ensure yields," says an official from a Japanese life insurance company.

     And "an increasing number of financial institutions are considering investing in foreign bonds," Nomura Securities chief rates strategist Naka Matsuzawa says, reflecting a common view.

     At the same time, flows of overseas capital into Japan have also increased. The combined value of foreign investment in such securities as stocks and bonds surged 39% to 267 trillion yen. Many are thinking about the Japanese economy in a new light amid a broader global uptrend in investment.

     Foreign net buying of listed Japanese stocks reached just over 15 trillion yen. This brought the total outstanding value of foreign-held shares to 145 trillion yen, meaning that the proportion of Japanese stocks held by foreign investors broke the 30% mark for the first time.

     Overseas investment in Japanese bonds, meanwhile, climbed 3% to 95 trillion yen.

     Indeed, more money has been flowing across the Japanese border in both directions on the back of optimism fueled by Prime Minister Shinzo Abe's vaunted Abenomics reforms. But in early 2014, the twin trends have showed signs of slowing down.

     By March 15, Japanese investors had sold just over 4.2 trillion yen more in foreign securities than they had bought, according to the Ministry of Finance. Inflows of foreign capital also seem to have ebbed since January.

     "The flow of funds may reverse if there is an increase in risk factors like a worsening of the situation in Ukraine," an official from a foreign securities firm warns.