Japan insurers dump foreign bonds on high yen, Y2K

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Wednesday January 12, 2:24 am Eastern Time Note: this article has a followup with more information. Japan insurers dump foreign bonds on high yen, Y2K By Mariko Hayashibara

TOKYO, Jan 12 (Reuters) - Japanese investors unloaded foreign bonds in December for the second consecutive month as the strong yen inflicted further losses on their holdings, securities investment data released on Wednesday showed.

Analysts said Y2K-related factors were also behind the move as investors turned skittish about tying up funds in foreign bonds, preferring instead to hold cash in case of possible computer glitches at the start of the millennium.

Japanese investors sold a net 202.3 billion yen worth of foreign bonds last month after selling a net 31.5 billion yen in November, data from the Ministry of Finance (MOF) showed.

In December, Japanese investors bought a net 970.4 billion yen worth of foreign bonds.

``Recent foreign exchange movements reflect this investment trend. I think this trend will continue until March and remain a factor behind a strong yen,'' said Mitsumaru Kumagai, a senior analyst at the Industrial Bank of Japan.

In December, the yen crept up to 101.30 yen, about 18.8 percent above its low for last year of 124.75 set in May. Against the euro, it set a fresh lifetime high of 102.05 yen, about 24.5 percent above its low of 135.10 on January 4, the European single currency's trading debut.


A breakdown of foreign bond investment by major types of investor showed life insurers remained net sellers of foreign bonds to the tune of 335.0 billion yen, against net sales of 121.4 billion yen in November.

A senior fund manager at a major life insurer said many life insurers were no longer in a position to take foreign currency risks, and those who invested aggressively in foreign bonds had to exit before their book losses expanded further.

A trend toward higher interest rates abroad was also adding pressure as the value of bond holdings dropped, he said.

Life insurers are also believed to be under pressure from Japan's Financial Supervisory Agency (FSA) to reduce foreign bond holdings, analysts said.


A widening of the interest rate gap between Japan, the U.S. and Europe may look tempting, but analysts expect the current trend to continue until the end of this financial year in March as Japanese investors are seen to be still sitting on huge foreign exchange losses on their foreign bond holdings.

At a 10-year maturity, the yield gain of holding U.S. Treasuries versus Japanese government bonds is around 4.9 percent, compared with around three percent a year ago.

The busiest period for Japanese investors to bring home money is usually between January and March.

Foreign bond investment may resume from the start of the new fiscal year in April, but the amount will still be modest especially with the introduction of the mark-to-market accounting system to the Japanese financial industry from April, said Toru Umemoto, vice president and forex strategist at Morgan Stanley Bank in Tokyo.

``Indeed, foreign bond investment could even weaken again in the July-September period as investors are expected to grow more nervous ahead of mid-year earning results,'' Umemoto said.

However, foreign investors poured more money into Japanese equities last month, buying a net 680.0 billion yen worth of shares, down slightly from November's 855.5 billion.

Cooments: It aint over till its over. It looks like US T-Bill rates will have to climb more. Bad for stocks.

-- Bill P (porterwn@one.net), January 12, 2000

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