Tuesday, March 13, 2001
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Posted on: Tuesday, March 13, 2001

Japan investors embracing government bonds


Bloomberg News Service

TOKYO — The Japanese, who control the world’s largest pool of personal assets, are buying bond funds after returns on post office savings dropped to almost nothing.

Individuals last year invested 5.4 trillion yen ($46.7 billion) in so-called Chukoku funds, which hold medium-term government debt and offer fixed returns, twice as much as in 1999, according to the Investment Trusts Association. It’s easy to see why: The Nikko Japan Chukoku Fund offers a fixed return of 0.51 percent, compared with 0.11 percent at the post office.

"Individual investors are taking money out of postal and bank accounts and putting it in government bonds because the returns are better," said Toshifumi Sugimoto, who helps oversee 300 billion yen ($2.6 billion) at Meiji Dresdner Asset Management Co.

The flow of savings is another good sign for a bond market that has soared this year. The Japanese economy is near recession, erasing any inflation threat. Stocks are tumbling, boosting demand for the haven of debt and the central bank is cutting interest rates.

The government-run postal savings system has 252.6 trillion yen in deposits, equal to a third of all outstanding Japanese government debt. One fifth of these accounts mature this year, with little incentive for holders to extend.

That could add momentum to a rally that has already brought 10-year bond yields down more than 40 basis points this year to 1.22 percent. Bond prices gain as yields fall and that has handed investors in 10-year government debt a gain of 4.3 percent, including interest.

"Ten-year bond yields may fall as low as 1 percent between April and June," said Keisaku Ujihara, who helps oversee about 1.2 trillion yen ($10.3 billion) at Sanwa Asset Management Co. "Investors are seeking government debt as a haven from declines in stocks and other investments."

Stocks

That means investors will likely earn more in bonds than in Japan’s Postal Savings and in stocks, with the Nikkei 225 stock average down 32 percent in the past six months.

Japanese government bonds outperformed stocks over the past six years, returning an average of 5.5 percent a year over that time, compared with the Nikkei 225’s 0.6 percent average annual loss.

Government debt "offers steady returns, and that has attracted a lot of investors," said Hiroshi Mitani, who helps oversee 979 billion yen ($8.27 billion) of debt at Nikko Asset Management.

As interest rates fall, so does the allure of Postal Savings. Just last week, the post office cut the interest it offers on savings accounts to 0.11 percent, following the Bank of Japan’s Feb. 28 decision to cut interest rates. The central bank lowered its target on the overnight interbank rate to 0.15 percent from 0.25 percent to boost spending and get the economy growing again.

Safety first

Some investors doubt the bond rally can go on much longer.

"It’s a dangerous time to be buying solely government bonds because more than likely, over the next few years, interest rates will rise and you will experience a capital loss," said Mark Farrington, who manages a 20 billion yen ($172 million) at BT Fund Management.

It’s those kind of risks that may keep post office account holders out of bonds. As a government-backed giant, the Postal Savings system still has the aura of invulnerability, and some investors said they are reluctant to give that up.

More than half the 5.7 trillion yen ($49.2 billion) of the post office deposits that matured in January were reinvested in the post office, according to the Ministry of Public Management, Home Affairs, Posts and Telecommunications.

"If I could get 2-3 percent, then I would consider investing my money," said Masumi Hanano, a 31-year-old company employee, whose 1 million yen ($8,359) account had been earning 6.3 percent before it matured last year. "But I can’t so I’d rather keep it where it is accessible and absolutely safe."

Fund flow

In response, the government is adopting policies to encourage Hanano and other citizens to invest their money in securities.

One such step that’s likely to draw more investors to bond funds is Japan’s version of the U.S.’s 401(k) pension investment plans.

These are funds in which employees can invest a portion of their salary, lowering their taxable income, paying the levy only when the funds are withdrawn at retirement.

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