Bloomberg News

Japan Buying Most Rand Debt in 2 Years as Real Lures Funds

November 15, 2011

(Updates prices in the 14th paragraph.)

Nov. 4 (Bloomberg) -- Japanese investors are buying the most South African rand bonds in more than two years and pumping yen into Brazilian real funds, seeking higher yields even as Europe’s debt crisis increases emerging-market currency swings.

Sales of rand uridashi bonds, which are marketed mainly to the Japanese, climbed 32 percent to 4.1 billion rand ($521 million) in October, the most since February 2009. Inflows helped boost assets at mutual funds invested in the real by $689 million since Oct. 1, double their declines in September, according to Barclays Capital.

The highest volatility in emerging-market currencies since 2009 has failed to quell the appetite of Japanese investors for overseas debt as their own government’s two-year bonds offer yields of 0.14 percent, compared with 5.8 percent in South Africa and almost 11 percent in Brazil. Foreign-asset buying and Bank of Japan intervention helped weaken the yen against all 25 emerging currencies tracked by Bloomberg this quarter.

“I’ve been putting my surplus money into higher-yielding overseas bonds as I can’t earn anything with Japan’s low interest rates,” said Masamichi Nomura, a 57-year-old retiree who owns Argentine and South African sovereign debt. “I don’t care much about the foreign-exchange rate as my investment is for the long-term.”

New Funds

The Bank of Japan has maintained its benchmark overnight rate between zero and 0.1 percent since October 2010 to support the economy, compared with 11.5 percent in Brazil, 5.5 percent in South Africa and 5.75 percent in Turkey. Japan’s economy may contract 0.5 percent in 2011 before expanding 2.3 percent in 2012, according to September estimates by the International Monetary Fund. Developing nations will expand 6.4 percent this year and 6.1 percent in 2012, according to the IMF.

Investors in Asia’s second-largest economy bought a net 1.06 trillion yen ($13.6 billion) in overseas bonds and notes during the week ended Oct. 28, according to data released by the Ministry of Finance in Tokyo. That was the third weekly net purchase and the biggest amount since the period ended Sept. 23.

At least 24 new yen funds investing in developing-nation debt are due to start in the five months ending Nov. 30, already more than the 22 sold in the first half, data compiled by Bloomberg show. Daiwa Asset Management Co., which oversees $119 billion of assets, will sell Indian and Indonesian bond funds on Nov. 16, the data show.

“Concern about further strength in the yen eased a bit and the yen may stabilize or weaken slightly from here,” Daisuke Kubo, the head of the bond-management department at Daiwa Asset Management, said in an interview in Tokyo on Nov. 2. “Indonesia and India have great potential due to strong domestic demand.”

Money-Losing Game

For the Japanese, investing in overseas bonds has been unprofitable this year as the European debt crisis and the global economic slowdown prompted investors to dump assets from Brazil to South Africa in exchange for the yen, a traditional safe-haven. The currency surged to 75.35 per dollar on Oct. 31, prompting Japanese Minister of Finance Jun Azumi to order intervention to weaken the exchange rate.

Local-currency government debt of developing nations lost 1.9 percent this year in yen terms, heading for their first annual decline in three, according to JPMorgan Chase & Co.’s GBI-EM Broad Index. South African and Turkish debt lost about 14 percent, as the rand fell 19 percent against Japan’s currency, and the lira declined 15 percent. Japanese sovereign debt returned 1.9 percent since Dec. 31, according to data compiled by Bank of America Merrill Lynch.

‘Huge Risk’

In the currency market, investors are expecting wider price swings. Implied volatility among emerging-market currency options, which measure investors’ expectations for foreign- exchange fluctuations, jumped to 19 percent on Sept. 22, the highest level since April 2009, according to data compiled by JPMorgan. It was at 15 percent yesterday.

“It’s a huge risk,” said Stephen Jen, the managing partner at SLJ Macro Partners LLP in London and a former head of the global currency strategy team at Morgan Stanley, in a telephone interview. “If we are right that the global economy will decelerate in the months ahead, emerging markets will have a problem. Fire exits are very narrow.”

Returns for yen investors, including interest income, may be at least 15 percent on the Argentine peso, the Polish Zloty, the lira, the rupee, the rand and Hungarian forint by the end of next year, Bloomberg analyst surveys show. The potential returns are based on the analysts’ forecast for the currencies and the interests earned on local deposits during the period.

The real advanced 9.7 percent against the yen this quarter, the South Korean won climbed 7.7 percent and the rand 4.1 percent. The Brazilian and South African currencies lost 20 percent in the third quarter.

‘Quite Solid’

“Retail investors’ risk appetite is still weak after they saw some losses in Brazil,” said Kazuya Sugiura, the Tokyo- based president of PineBridge Investments Japan Co., manager of the biggest emerging-market debt fund not dedicated to a specific currency. “But if you look at the long-term perspective, demand for Brazil funds will be quite solid.”

The Japanese started to boost their investments abroad in early 2000 after the housing-market crash in the 1990s sank the economy into stagnation and deflation. Mutual funds increased holdings of foreign assets, including stocks and bonds, to 42 trillion yen last year, or 48 percent of total assets, from less than 10 trillion yen in 2000, according to a presentation by Nomura Holdings Inc., the largest brokerage firm in Japan, in September. They still had $10 trillion in yen-denominated cash deposits in 2010, according to Nomura.

Sound Credits

“Japanese retail investors have lived in a low interest- rate environment for over 15 years and are looking for yield on their investment,” said Joakim Holmstrom, the head of funding at Helsinki-based Municipality Finance Plc, which has sold 293 million rand of uridashi notes in three separate issues this month. “They are happy to take the currency exposure but don’t want to combine this with credit risk. Issuers like ourselves are sought after as we represent a sound AAA credit.”

Municipality Finance’s 58 million rand of three-year notes pay interest of 5.3 percent, compared with 0.2 percent for Japanese government debt of similar maturity.

Japan’s central bank will keep its benchmark rate unchanged until at least the end of third quarter of 2013, according to 13 of 14 economists surveyed by Bloomberg last month. Finance Minister Azumi said on Oct. 31 he would keep intervening to curb gains in the yen until he was “satisfied.”

“People here face almost zero percent interest on their ordinary deposits and so, there is quite a strong demand for higher-yielding assets,” said Masatsugu Yamamoto, senior portfolio manager of the global fixed-income group at DIAM Co. in Tokyo, which has about $123 billion of assets under management. With currency intervention stabilizing the yen, it is “a good environment for Japanese investors to buy emerging- market assets,” Yamamoto said.

--Editors: Sandy Hendry, Andrew Janes

To contact the reporters on this story: Yumi Teso in Bangkok at; Robert Brand in Cape Town at; Ye Xie in New York at

To contact the editors responsible for this story: Sandy Hendry at; Gavin Serkin at; Dave Liedtka at

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