Japanese investors seen piling into Aussie debt

SYDNEY: Australian debt is set to be a major beneficiary of Japan’s offshore investment push, attracting up to $63 billion of Japanese bond investment by 2018, HSBC said on Thursday.

HSBC estimated as much as $500 billion of Japanese savings could be re-allocated to international assets over the next two to three years, with a big chunk of that likely to head to Australia.

Australia’s 10-year government bond yields of around 2.5 percent are eye-catching compared with Japan’s 0.4 percent. Its two-year debt pays 1.8 percent compared to negative returns for paper in Germany, France and Switzerland.

Roger Bridges, chief global strategist for interest rates and currencies at Nikko Asset Management in Sydney, said Australia is an attractive alternative for Japanese pension funds cutting back on yen bonds.

“US bonds are a stand-out buy, but if you really didn’t want to go all-in to the US, Australia and New Zealand would be next,” he said. Nikko manages A$24 billion of funds in Sydney.

Of the $44 billion of offshore bonds bought by Japanese investors in 2014, $5.6 billion went into the Australian federal government’s AAA-rated bonds, according to HSBC.

Around 70 percent of Australia’s A$357 billion national debt is held offshore, with Japan accounting for a solid share. The exact breakdown is not disclosed by the country’s funding agency.

Australian government debt is expected to expand for several years as successive Australian governments have struggled to control budget deficits.

HSBC highlighted the recent introduction in Japan of life insurance products denominated in Australian dollars, offering higher payouts than yen-denominated equivalents.

Another sign of Japan’s appetite for Aussie assets is reflected in the sales of uridashi -bonds denominated in foreign currencies and sold to Japanese individual investors.

Around one third of uridashi sold so far this year were in Australian dollars, HSBC said.