Finance readies promos to hawk JGBs overseas

by Yasushi Azuma

Kyodo News

The Finance Ministry is once again warming up its overseas bond campaign in hopes of diversifying its bondholder base to increase stability and management of the Japanese government bond market.

The ministry launched promotional tours in January 2005, sending senior officials to Australia, Britain, France, Germany, the Netherlands, the United States, Singapore and Hong Kong.

It now plans to hold JGB promotion seminars next year in North America, Europe and the Asia-Pacific region to boost the ratio of JGBs held overseas.

“We would be grateful if the ratio hits 10 percent,” a ministry official said.

The ratio of overseas JGB holders to domestic holders inched up to 5.1 percent as of Sept. 30, up from about 3.2 percent three years ago. But that’s still abnormally low compared with other developed countries, including the U.S.

For example, foreign investors held 42.6 percent of U.S. government bonds and 26.5 percent of British government bonds as of June 30, giving them more money to support their economies.

In Japan, however, bonds remain mostly in the hands of financial institutions, whose homogenous behavior could create future volatility in the bond market. This was the result of a wave of realignment in the financial industry in the late 1990s that reduced the number of Japanese banks.

“A smaller number of players means a more potential risk of volatile movements,” the official said.

The government is thus trying to boost JGB ownership by foreigners and domestic households because they are less likely to act in a uniform manner, a ministry official said.

Japanese financial institutions, particularly banks, tend to move like a herd, reacting to the same economic indicators and interest rate movements at home, he said. Almost 40 percent of JGBs are held by banks and other financial institutions, including Japan Post. The postal corporation, whose vast holdings of postal savings and insurance money effectively make it the world’s largest bank, has been the biggest buyer of JGBs. It is scheduled to be privatized over a 10-year period starting in October.

There has been some talk that JGB promotion campaigns are being planned for other emerging economies, including the so-called BRICs — Brazil, Russia, India and China — and oil-rich countries in the Middle East.

At the moment, however, the ministry seems fearful of hawking bonds in such countries.

“Singapore and Hong Kong are quite different from other emerging economies in terms of their roles as key international financial bases in Asia along with the Tokyo market,” the official said without elaborating.

A bond strategist in Tokyo, however, said the Finance Ministry has already approached the Middle East about JGB promotions. The ministry disagrees.

“Though the ministry officials meet investors individually there now, I believe the ministry will launch official promotion tours eventually in the future,” the strategist said.

Keiko Onogi, senior JGB strategist at Daiwa Securities SMBC Co., said the Finance Ministry has a lot to do before exploring the possibility of promoting JGBs in BRICs or the Middle East.

“Such countries could be targets of JGB sales some day in the future, but I think the ministry’s efforts to promote JGB sales in major developed countries is insufficient and it should put priority on promotions there,” she said.

Meanwhile, Japan is also considering introducing 40-year government bonds in the second half of fiscal 2007 at the earliest, in addition to present issues that mature in 30 years.

The issuance of a 40-year government bond is likely to be a one-time offer in a small amount — perhaps dozens of billions of yen — depending on demand.

The ministry believes the issuance of such long-term government bonds with a fixed interest rate will help reduce the government’s debt-servicing costs and develop the bond market, especially when interest rates remain near rock bottom.

Britain issues government bonds with maturities of 40 years and 50 years, while France issues 40-year bonds.

Still, a majority of bond dealers think it is too early for the ministry to issue such ultralong-term government bonds.

Onogi said there is no strong demand in Japan for government bonds with maturities of 40 years or longer. The Finance Ministry should foster the market for 30-year government bonds first, given that even this maturity has not been attracting enough buyers, she said.