$3 Trillion Overseas Funds 'Japan Repatriation Tsunami' Forecast... Global Financial Markets Are Shaking

Interest Rate Volatility Rises for the First Time in Over 10 Years... Bloomberg Warns of Global Bond and Stock Sell-Off Risk
Japanese Investment Hits $3 Trillion... US Stock and Bond Holdings Reach 2,000 Trillion Won, 7.3% of US GDP
Massive Inflows into Netherlands and Australia... Concerns Over Chain Reaction in Emerging Markets

[Asia Economy Reporters Haeyoung Kwon and Jieun Lee] Japan, which had been the last bastion of quantitative easing policy, has hinted at an effective interest rate hike through a surprise announcement, raising concerns that a significant portion of Japan's capital, amounting to $3 trillion (3,870 trillion KRW), could exit the market. With the upward adjustment of the interest rate fluctuation range on yen funds, there is a forecast of a so-called 'Kuroda Shock.'

Foreign media such as Bloomberg and Nihon Keizai reported on the 20th (local time) that "the shock from Bank of Japan Governor Haruhiko Kuroda has begun," and predicted that "Japan's policy changes could trigger bond and stock sell-offs in the global financial market." This observation came after the Bank of Japan (BOJ) held a monetary policy meeting the previous day and expanded the fluctuation range of long-term government bond yields from ±0.25% to ±0.50%.

Experts conveyed concerns through foreign media that the BOJ's upward adjustment of the interest rate fluctuation range, contrary to its decade-long stance, is effectively an interest rate hike or a prelude to a future rate increase. They explained that there is a high possibility of liquidating 'yen carry trade' funds?investments in overseas assets using ultra-low interest rate yen?and repatriating funds back to Japan. Countries that have received significant inflows of Japanese investor funds are particularly vulnerable to the BOJ's shift in monetary easing policy. The Wall Street Journal cited experts saying, "U.S. investors are worried that the BOJ's move might trigger Japanese institutional investors to sell U.S. Treasury bonds."

Japan is the world's largest bond holder and is known as a major player in overseas stock and bond markets, with potentially exit-capable funds totaling $3 trillion. According to Bloomberg, Japanese institutional investors such as banks and pension funds have invested over $3 trillion in overseas stocks and bonds, with Japan's holdings of U.S. stocks and bonds alone currently estimated at more than $1.5 trillion (about 1,940 trillion KRW). This amounts to about 7.3% of the U.S. Gross Domestic Product (GDP). Japanese funds have also flowed heavily into other countries. Japan's investments in Dutch stocks and bonds amount to 9.5% of that country's GDP. Significant Japanese investor funds have also been invested in Australia (8.3% of GDP), France (7.5%), the United Kingdom (4.6%), Belgium (4.5%), and Canada (4.1%). Bloomberg warned, "The successor to Governor Kuroda, whose term ends in April next year, will seek a path toward financial normalization."

There is also a considerable possibility of a chain reaction affecting asset markets, including emerging countries. Amir Anbarzadeh, a strategist at Asymmetric Advisors, said, "Allowing Japan's interest rate hike could trigger a tsunami of repatriation of Japanese funds overseas," calling it "a massive shift in movement."

Financial markets have already been shaken following Governor Kuroda's announcement. The U.S. 10-year Treasury yield rose to 3.7%, marking the largest increase in three weeks. The U.K. 10-year gilt yield rose by 0.1 percentage points to 3.6%, and the German 10-year bund yield increased by 0.1 percentage points to 2.27%. Bloomberg also diagnosed, "The Kuroda Shock is just the beginning of a dangerous path toward an exit."

[Image source=Yonhap News]

Despite global financial market concerns, the Bank of Japan abruptly revised its monetary easing stance because the prolonged ultra-low interest rate policy had caused a severe yen depreciation and a surge in inflation. The BOJ had maintained long-term interest rates at around 0 to 0.25%, purchasing government bonds unlimitedly at fixed prices. This policy widened the interest rate gap between the U.S. and Japan, increasing selling pressure on the yen. As a result, the yen's value plummeted sharply, and in October, the dollar-yen exchange rate broke through the psychological barrier of 150 yen. Amid soaring prices of raw materials and foodstuffs due to the Russia-Ukraine war, the unprecedented yen depreciation pushed Japan's consumer prices above 3% in September for the first time in 31 years. This exceeds the BOJ's inflation target of 2%.

Excessive government bond holdings are also cited as one of the reasons behind this monetary easing policy revision. To suppress the rise in 10-year government bond yields, the BOJ purchased bonds unlimitedly, resulting in a bond holding ratio of 50.3% as of September, surpassing half for the first time in history. Ten years ago, the BOJ's bond holding ratio was only about 10%. As the BOJ's bond holdings increased and the domestic-foreign interest rate gap widened, the attractiveness to investors diminished.

This has also become a fiscal burden for the BOJ. The payments for government bonds purchased from financial institutions have accumulated in current accounts that financial institutions hold at the BOJ, reaching a staggering 470 trillion yen (about 4,590 trillion KRW). The Asahi Shimbun pointed out, "If interest rates rise by 1%, the principal and interest payments the BOJ must make to financial institutions in 2025 will increase by 3.7 trillion yen (about 36 trillion KRW) compared to current estimates," warning that "the BOJ could face insolvency."

This content was produced with the assistance of AI translation services.