Foreigners Increase Japanese Bond Holdings

Foreign purchases of Japanese Government Bonds (JGBs) rose to a multi-year high, according to a report issued by the Bank of Japan on Tuesday. The bank also highlighted that Japanese household holdings of their national government's bonds fell to the lowest levels since 2005. This fall signaled increasing dependence on foreign investors to finance the world's largest public debt. Tuesday's report reflects data up until the end of fiscal 2011, which took place in March 2012.

According to the central bank, foreign investors held 8.3% of total JGBs. This was the highest level since 1979, the earliest date data is available from the bank. Japanese households cut holdings to just 3 percent of bonds outstanding. Japanese citizens widely hold their nation's bonds. This domestic support is one reason Japan has been able to run up large debts without following embattled European economies into debt crises. The combination of a central bank monetizing debts and households demanding domestic paper has allowed Japan to maintain a debt-to-GDP ratio above 220%.

The crisis in Europe has caused an exodus of capital from the continent, driving deposits into safe-haven currencies such as the yen. Investors often move these deposits into JGBs in hopes of finding yield. This type of investment has likely contributed to the uptick in foreign holdings of JGBs. In addition, 55% of total Japanese household financial assets were in cash and short term deposits, as compared to 14% in the United States. This figure further highlighted fear of global risks in Japan.

Foreign currency deposits also rose in the year-ended March, hitting an eight-year high of $79 billion. This data does not reflect any changes in holdings that may have occurred due to Fitch downgrading Japan's long term rating to A+. As a result of this downgrade, some funds may have been forced to buy or sell JGBs.