Japanese Slow Investment in U.S. Markets : No Evidence Signals a Pullout of Funds

The Japanese have applied the brakes to the flow of money into American financial markets, but so far there are no signs that any Japanese money is being brought out.

Reports reaching here Friday from Japanese stockbrokers in New York indicated that Japanese investors, who had been buying as much as 40% of the 30-year bonds the Treasury Department auctions, bought only 20% of the $4.78 billion in bonds put up for bid Thursday.

The caution stemmed not only from uncertainty about the future of the U.S. economy, but also from the plummeting value of the dollar, which hit a new low Friday on the Tokyo Foreign Exchange market. It was the third straight day it had done so.

The dollar finished at 135.50 yen in Tokyo, down from Thursday’s record low close of 135.95 yen. Later, the dollar closed even lower in New York, at 135.05 yen, compared to 135.10 yen on Thursday.

In the six-month period that began in April, Japanese investors bought $667.4 billion worth of foreign government bonds--for the most part U.S. bonds--while selling $625 billion worth, for net new holdings of $42.4 billion.

But such transactions declined by 32%, compared to the same period of 1986.

Stock Investment Halted

After reaching a peak of $12.3 billion a month in June, net purchases of foreign government securities fell to $8 billion in July, $6 billion in August and only $2 billion in September. Statistics for October are not yet available but net purchases for the month are estimated to be close to zero.

Net overseas investment in stocks rose to $14 billion between April and September from $7.1 billion in the same period last year. But the collapse of the New York stock market Oct. 19 has virtually halted Japanese investment in U.S. stocks.

“If, in addition to stocks, exchange rates become unstable, Japanese won’t feel like reopening their investment in the United States,” Susumu Okawa, managing director of the Yasuda Trust Bank, told the newspaper Asahi.

Last year, $130 billion in capital flowed out of Japan and about half of it went to the United States, a quarter of it to Europe.

Fearing that the Japanese might not bid at this week’s Treasury auction in the United States, Finance Ministry officials called in executives of trust banks, insurance companies and other institutional investors to “ask what our plans were,” said Noriaki Hanamizu, manager of the treasury and securities investment section of the Mitsubishi Trust Bank.

Suggestion Rejected

This, he said, was the Japanese way of urging investors to take part. The Finance Ministry took a similar step last May.

The Mitsubishi Trust Bank, which holds about $7 billion in U.S. Treasury bonds, rejected the ministry’s suggestion, Hanamizu said.

“At present, it’s very hard to judge whether prices of Treasury bonds will go down or up,” he said, adding that trying to figure out which way the U.S. economy will move poses the same puzzle.

Thursday’s auction offered only about half of the usual amount of 30-year bonds put up for bid, making Japanese participation less significant than usual, and the collapse of stock prices has made bonds more attractive to American investors.

“This time, the auction will go all right with just domestic American purchases,” Hanamizu had said a day before the Treasury Department accepted bids on the bonds. “We see no need for us to cooperate.”

Besides, he said, Japanese insurance firms had agreed to participate.

Two U.S. economists, who asked not to be identified by name, said the existence of “a lot of Japanese savings with few outlets for investment” had contributed not only to keeping Japanese money in the United States but also to driving the Tokyo stock market to gains far more spectacular than elsewhere before the New York crash last month.

The savings pool also prevented Tokyo stock prices from falling as sharply as they did in New York and elsewhere, one of the economists said.

The Americans, as well as Japanese analysts, said Japanese savings began to overflow heavily into foreign stock markets in the last year, a development they said helped to drive up prices on the New York Stock Exchanges and on European exchanges.

They put no blame on Japanese investors for the market crash and said Japanese investors held onto their U.S. stocks during the New York plunge.

But Hanamizu said Japanese investors are now having second thoughts about American stocks. Purchases, he said, began as part of diversification of investments after prices on the Tokyo Stock Exchange “got expensive,” making overseas stocks seem like a bargain.

“We spread our investments to the United States and elsewhere,” he said. “Stock prices everywhere went up and much of this was caused by Japanese purchases. In West Germany, almost all the increase in stock prices was brought about by an inflow of Japanese money.”

Now, on re-examination, the rise of U.S. corporate profits appears less impressive than on first glance, he said, adding that “much of the improvement is a backward-looking prosperity” brought about by firing workers and restructuring.

“American corporate productivity is not that good,” he said. “Now, I feel we made a mistake.”

Although U.S. Treasury officials in Washington have put net Japanese purchases of all American government debt instruments at only about $18 billion since 1986--3% of all public debt and less than 7% of U.S. Treasury bond sales--Japanese have been buying between 30% and 40% of the issues of 30-year Treasury bonds.

Big Market in Bonds

“Life insurance companies, for example, must pay premiums from interest income,” one of the American economists here said. “As a result, institutional investors want to lock in a good yield over a long period. They have an appetite for long-term investments.”

In Japan, most government bonds mature in 10 years. Only recently have 20-year bonds been issued and their supply is limited. Only in the United States is there a big market in 30-year bonds--bigger than in other countries because America’s budget deficits are bigger, the economist said.

He described Japanese investments in U.S. government bonds as “almost a captive market.”

“There really isn’t a major alternative,” he said.

Hanamizu described the motives of Japanese institutional investors in similar terms. “We are forced to buy bonds in a country (like the United States) with a weak currency because that’s where the biggest budget deficit”--and therefore the biggest market--exists, he said.

So large have investments in the United States grown, he said, that selling them off would drive down prices of bonds--or stocks. “It would be like strangling ourselves with our own hands,” he said.

Although his bank decided to stay out of the Treasury Department auction this week, he said, the bank might have made purchases if it had concluded that Japanese money was needed to keep U.S. bond prices stable. “We are aware that our behavior affects the market, but this time we thought the auction could get along without us,” he said.

Within certain limits, he said, Japanese institutional investors are willing to assume long-term exchange risks in return for higher yields in the United States. But recent declines in yields have made U.S. bonds less attractive. Compared to yields of up to 10.4%, which were available only recently in the United States, “9% doesn’t look that good,” Hanamizu said.

At present, the gap between interest rates in Japan and the United States is running at around 4% to 4.5%, although, with inflation figured in, the real interest gap is probably close to zero, one of the American economists said.

Japanese investors, Hanamizu predicted, will renew their investment in U.S. stocks and bonds if the U.S. government gets its budget deficit under control. But until then, he said, caution is indicated.