Strategy

Multi Family Office Warns On Japan's "Ticking Time Bomb"

Tara Loader Wilkinson, Editor Asia, 27 September 2012

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Thinking of investing in Japanese government bonds? Think again, is the message from the investment arm of Stonehage Group, the multi-family office for ultra-high-net-worth families and entrepreneurs.

Although the troubled Eurozone has been receiving the bulk of the unwanted press, Stonehage warned that in Asia there is a potential investment time bomb which could prove just as disastrous.

Japan’s debt-to-GDP ratio at 220 per cent, is almost double that of Italy. Yet the Japanese bond market has not behaved in the same way as in Europe, as domestic investors continue to prop up the country’s bond market, said Stonehage. 

Anticipation among investors of a transition to a more externally-funded system has prompted many investors over the years to consider “shorting” JGBs, yet prices have continued to rise and yields have fallen to very low levels.
 
Ronnie Armist, executive director at Stonehage Investment Partners, said: “High levels of domestic household and corporate savings have sustained the issuance of JGBs in recent years. However, as the country’s population ages and continues to draw on its US$1.37 trillion public pension fund, the Japanese government will become more and more dependent on external investors (or the Bank of Japan) to support its bond markets."
 
“This may result in a rise in yields and a fall in prices as investors question the long-term real value of bonds issued by a country with such a high debt-GDP position. Given the current yield of 1 per cent on 10-year Japanese Government Bonds, we don’t believe this represents a worthwhile investment today.”
 
The warning comes as the Yen was put under increasing pressure last week: policy makers pushed for the central bank to ease monetary restrictions after the US Federal Reserve's stimulus measures nudged up the Yen against the dollar.
 
Kirsten Giddey, director, SIP added: “We hold limited exposure to the Yen within our client portfolios. If required, the Japanese central bank could also elect to inflate away its debt burden and this would be a negative for the currency. We are not recommending outright short positions either on Yen or on Japanese Government Bonds as the timing of this outcome is extremely uncertain. However, we are avoiding both of these markets and recommend investors do the same.”
 
SIP is Stonehage Group’s investment advisory arm, currently advising on US$2.4 billion in wealthy family assets. The Stonehage group advises on $30 billion of assets, with clients typically worth between $50 million and $1 billion.
 

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