Japan: Portfolio shift to equities from bonds? - Nomura

Yujiro Goto, Research Analyst at Nomura, notes that the Nikkei QUICK bond investor survey showed that there may have been a portfolio shift away from JGBs into equities, credit products, and foreign assets.

Key Quotes

“The survey asked bond investors to make an assessment of their asset allocation in FY2017, in comparison with FY2016. 48% of investors said that they would increase their exposure to domestic equities from FY2016, while 11% replied they would decrease (DI: +37%). They also suggested they would increase their exposure to foreign equities (DI: +32%), credit products (foreign, DI: +22%, domestic, DI: +20%). In contrast, only 17% of investors replied they would increase their exposure to JGBs, while 36% said they would decrease (DI: -19%).”

“While the BOJ continues its yield curve control policy, JGB investment is viewed as less attractive by domestic bond investors. Historically, active investment in equities tends to be associated with JPY weakness against the commodity currencies. At the same time, we think it will be important for the BOJ to maintain its commitment to the 10yr yield target to avoid risk-off type reactions while bond investors have shown fewer incentives to add to JGB exposure.”

“Bond investors also expect to increase exposure to foreign assets (sovereign bonds, credit products, and equities). The survey results show hedged-based investment in foreign sovereign bonds (DI: +14%) is still slightly preferred to unhedged-based investment (DI: +9%). Japanese investors preferred to take credit risks to FX risks last year and the trend may continue for the time being, especially as political risks remain high. As the hedging cost of USD assets will increase further as the Fed hikes, we expect unhedged investment to be more active gradually though. Major life insurance companies are expected to release their investment plans in H2 April, which would show more detailed information on their portfolio investment stances in the new fiscal year.”