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Japanese now hold 1,000tn yen worth of foreign assets

Bank of Japan's hyper-easy monetary policy is chasing cash overseas

Euro, Hong Kong dollar, U.S. dollar, Japanese yen, British pound and Chinese 100-yuan banknotes pose for a group photo on Jan. 21, 2016.   © Reuters

TOKYO -- Foreign assets held by Japanese institutional and individual investors appear to have topped 1,000 trillion yen ($8.79 trillion) for the first time, according to Nikkei estimates. The amount has increased roughly 50% during the past five years and now is more than twice as much as the country's gross domestic product.

There is, however, a downside to pouring so much money overseas -- it makes Japan increasingly prone to the shifting global economic climate and other foreign risks.

Japan's external assets held by corporations and individuals at the end of June, mainly through direct and securities investments, came to some 990 trillion yen, according to the Ministry of Finance. Separate data from the ministry shows Japanese investors' foreign securities holdings have expanded 10 trillion yen or so since July. Taking into account the yen's recent depreciation, it is highly likely that the country's foreign asset holdings have smashed through the 1,000 trillion threshold by now.

The U.S. holds more external assets than any other country, $23 trillion worth, according to the International Monetary Fund. But in terms of growth, Japan is far-outpacing the U.S. and other leading economies. U.S. foreign asset growth came in at less than 10% over the five-year span. Foreign assets held by Germany and France shrank during the same period.

Securities seem to have accounted for nearly half of the 1,000 trillion yen that has escaped overseas. Japanese investors were holding 453 trillion yen worth at the end of June, up 100 trillion yen or so over the past three years.

Japanese investors are in the midst of a major shift -- pulling their cash out of domestic securities and placing it in overseas markets. They have been pushed to this collective decision by a hyper-aggressive Bank of Japan, which for more than four years now has been flooding the country's economy with so much yen that cash instruments can only earn negligible interest. A 20-year Japanese government bond, which typically earns more than shorter-term JGBs, now comes with coupons as low 0.6% or so a year.

Yoshinobu Tsutsui, president of Nippon Life Insurance, says Japanese institutional investors would buy domestic assets if they could get interest rates of at least 1% or so. Largely coming up empty in this regard, though, these investors are now taking their hunt overseas. The Government Pension Investment Fund, Japan's largest public pension fund, had raised the proportion of foreign securities to 37% of its total portfolio by the end of June -- up 17 percentage points from five years earlier.

Looking at the figures by types of investors, the amount of foreign assets held by corporations and financial institutions has roughly doubled over the past five years to 168 trillion yen at the end of June. This is largely due to an increasing number of Japanese companies buying foreign businesses, mainly in Asia and the U.S. Another trend is to put gains from overseas investments toward updating overseas facilities and otherwise using them abroad rather than at home.

Meanwhile, individual investors are also looking for overseas investment opportunities. According to BOJ data on fund flows, individual investors at the end of June had more than 100 trillion yen worth of mutual fund investments, double the amount of five years earlier. Real estate investment trusts and high-yield bonds issued in the U.S. are particularly popular among small investors, often elderly folks, who are using mutual funds to shift out of Japanese equities.

By investment destination, nearly half of securities investments were directed to the U.S., while close to 30% went to Europe. Most direct investments were made in North America and elsewhere in Asia.

According to a Nikkei calculation based on the BOJ's fund flow numbers, the weaker yen accounted for 150 trillion yen worth of the increase in the value of Japan-held foreign assets over the past five years. On the other hand, inflows of investment money increased by a little more than 200 trillion yen over the same period. 

In the global stock market, there is a widespread sense of relief as investors see prices move toward a "great moderation" with less volatility and risk-induced fluctuations. This could be the best time to reap the benefits of the global market. In Japan, though, warns Toru Suehiro, senior market economist at Mizuho Securities, "the economy is increasingly prone to the global economic climate, currency markets and other overseas factors."

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