Japan: How sustainable are strong Japanese flows into euro area bonds - Nomura

Yujiro Goto, Research Analyst at Nomura, points out that the appetite for euro area bonds among Japanese investors has been attracting strong market interest and estimate that they are still underweighting euro area bonds.

Key Quotes

“As the return on FX-hedged investment remains attractive, we expect strong Japanese flows into euro area bonds for the time being. These should support EUR/JPY via tighter peripheral spreads. However, over the next three to nine months, the euro area share in Japanese portfolios could normalise to pre-ECB-QE levels. The ECB is widely expected to announce and begin the termination of its QE programme at the same time. Japanese investors will likely want to avoid high volatility and the risk of a yield spike. This leads us to expect a switch to unhedged US bond investment as we approach H2 this year.”