Japanese Government Bond Market: Confirming Recent Movements of Major Investors

■ Amidst heightened market expectations of continued interest rate increases, investor activity in the Japanese government bond market can be observed through over-the-counter (OTC) trading volumes of government and corporate bonds.  

■ Recent data shows strong investment demand from trust banks and foreign investors, while life and property insurance companies appear more cautious. 
 
This article will analyze recent investor activity in the Japanese government bond market based on the OTC trading volumes of government and corporate bonds released on June 22nd. Since May, the yield on 10-year Japanese government bonds has remained at its highest level since May 1997. As noted in the PRESTIA Insight* report released on the 19th, discussions about the supply-and-demand situation in the Japanese government bond market are expected to receive increasing attention. The Bank of Japan's June monetary policy meeting (held June 15-16), released on the 24th, reaffirmed that the Bank of Japan will continue to pursue interest rate hikes. The Japanese government bond market is expected to continue to be affected by expectations of further interest rate increases. 
 
Among various investment entities, three types of institutions deserve special attention: trust banks, foreign investors, and life and property insurance companies. It is generally believed that the trading activities of trust banks can reflect the allocation of funds, such as pension funds. In May, net purchases of medium-term government bonds (441.2 billion yen), long-term government bonds (568.8 billion yen), and ultra-long-term government bonds (1.1217 trillion yen) were all recorded, presumably mainly due to portfolio rebalancing amid rising stock markets and interest rates. This is because, according to the Japan Exchange Group's May investor-classified stock trading data, trust banks net sold approximately 433.8 billion yen worth of stocks that month. 
 
On the other hand, foreign investors continued to show a preference for Japanese government bonds. In addition to continuing its investments in short-term treasury securities (T-Bills, net purchases of approximately ¥17.3 trillion) that are considered to employ currency hedging strategies, it also made net purchases in medium-term interest-bearing government bonds (net purchases of ¥277.6 billion), long-term interest-bearing government bonds (net purchases of ¥706.1 billion), and ultra-long-term government bonds (net purchases of ¥824.9 billion). While "foreign investors" are typically investors who flexibly adjust their positions based on market trends, they have become a significant force supporting the improved supply and demand in the Japanese government bond market, at least in the near term. 
 
On the other hand, it can be argued that "life and property insurance companies" are currently curbing their investment in the Japanese government bond market. Generally, life insurance companies, due to the need to match the maturity of the liabilities of the insurance products they sell, have long been a stable demander of ultra-long-term government bonds. In May, while both medium-term and long-term interest-bearing government bonds saw net purchases (105.3 billion yen) and 211.2 billion yen, respectively, ultra-long-term government bonds, their primary investment target, recorded net sales of 201.2 billion yen. This indicates that, amid growing market expectations of further interest rate increases, they adopted a wait-and-see approach to their overall investment in Japanese government bonds. According to media reports in late May, the unrealized losses on government bonds held by Japan's four major life insurance companies had widened to 14 trillion yen, suggesting they were adjusting their bond holdings in conjunction with profit-taking in stock investments. Particularly in the ultra-long-term bond market, there is widespread expectation that life insurance institutions can fill the demand gap left by the Bank of Japan's reduction in government bond purchases. Therefore, continued monitoring of the movements of life and property insurance companies, a key investment vehicle, is necessary.