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Flood of Japanese Cash Boosts EU Bonds

Japanese Prime Minister Shinzo Abe delivers a speech in Yokosuka, Kanagawa

Photograph by Kazuhiro Nogi/AFP via Getty Images

Japanese Prime Minister Shinzo Abe delivers a speech in Yokosuka, Kanagawa

The tidal wave of bond buying announced by Japan late last week is washing up on European shores this morning.

Investors poured into European sovereign debt today, in part because the Japanese stimulus sent yields on that country’s debt diving to a record low. The Bank of Japan announced a plan Thursday to double its current bond buying, pumping $746 billion into its economy every month in an effort to tick inflation up to its 2 percent target and put an end to deades of deflation.

Suddenly, Europe doesn’t look so risky.

Yields on 10-year bonds issued by France, Austria, Belgium, and the Netherlands hit record lows today, as Asian investors clamored for returns elsewhere.

Japan’s retail investors are probably more prone to bond buying than others. Almost one-quarter of the country is aged 65 or older, compared with only 14 percent of the U.S. population. As investors age, they tend to switch from riskier equities to safer, coupon-paying bonds.

The drastic easing in Japan also shrank borrowing costs for Europe’s shakier economies. In Spain, where unemployment hit a record 26 percent at year’s end, yields on 10-year sovereign bonds plunged to 4.7 percent, their lowest levels since October 2010. Last July, yields on Spanish debt surged to 7.5 percent. The yield on Italy’s 10-year benchmark also slid to 4.3 percent, more than two percentage points below its spike in July 2012.

Japanese stocks, meanwhile, are hot. The Nikkei 225 stock index has surged close to a five-year high since the Bank of Japan meeting. Ao far this year, the index is up 27 percent.

The Financial Times has a thorough take on the frantic buying here.

Stock is an associate editor for Twitter: @kylestock

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