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By Vidya Ranganathan
SINGAPORE (Reuters) - Even as the Bank of Japan prepares for a pivotal change in monetary policy, analysts say much more will need to be done to materially shift the roughly $3 trillion of yen Japanese investors have parked in global bond markets and yen trades.
Japanese investors have invested trillions of yen overseas in their quest to earn anything better than the near-zero returns at home under the BOJ's decades-long effort to end deflation.
The BOJ might change that policy as soon as this week. Rising wages and other business activity suggest stagnation is over, meaning little need for the BOJ to continue to keep short-term rates negative.
Anticipation of better growth has drawn foreign money into Japanese stocks and driven yen bond yields higher.
It has also put the spotlight on the $2.4 trillion of foreign debt Japan's life insurance companies, pension funds, banks and trust firms collectively hold, and how much of those investment flows will return home.
But these holdings earn yen investors upwards of 5%, so investors will barely react if the BOJ raises its rates by 10 or 20 basis points, analysts say.
"I honestly don't think it will have a big impact on flows," says Alex Etra, a senior strategist at analytics firm Exante Data.
Japan's overall foreign portfolio investments were 628.45 trillion yen ($4.2 trillion) at the end of December, Ministry of Finance data shows - more than half in interest rate-sensitive debt assets, and most of it long term.
The BOJ embarked on its quantitative and qualitative easing (QQE) in May 2013. Between then and now, Japanese investment in foreign debt was about 89 trillion yen, nearly 60% of which belonged to pension funds, including the giant Government Pension Investment Fund or GPIF.
Exante's Etra says the country's pension funds routinely do not hedge their overseas bond investments for currency risk and their returns on foreign bonds are attractive, particularly when translated into yen.
HEDGING IS PAINFUL
"I’m not a huge believer of that repatriation story," said Gareth Berry, currency and rates strategist at Macquarie Bank.
"If you look at the numbers down the last 20 years, in fact there was very, very little repatriation even during the GFC," he said, referring to the Global Financial Crisis of 2008.
In contrast to pension funds, Japan's big banks and life insurance firms tend to hedge their foreign bond holdings, to mitigate any risk to their deposits and other yen liabilities.
Flows data shows this class of investors, which includes Japan Post Bank and cooperative bank the Norinchukin Bank, has gradually trimmed foreign debt holdings since 2022.