Japanese

Accelerating yield hikes fuel capital repatriation, threatening to drive up USD debt issuance costs.

Japan’s rapidly rising interest rates are providing another significant variable for corporate treasurers with upcoming bond offerings or refinancings to monitor.

While the deluge of debt issued by so-called hyperscalers has yet to increase other companies’ borrowing costs, it’s critical for treasurers to track it alongside another recent development: rapidly rising Japanese interest rates.

The Japanese government and private investors hold $1.2 trillion of U.S. federal debt, more than any other country, according to the Congressional Research Service, and they are major investors in U.S. corporate bonds. Three years ago, the 10-year Japanese government bond rate was close to zero, as it had been for decades, prompting Japanese investors to seek yield abroad. The rate began increasing in 2022 and has nearly doubled over the past year, approaching 2.9% by mid-August.

Lotfi Karoui, a multi-asset credit strategist at PIMCO, noted in an Aug. 3 report the accelerating reduction in U.S. Treasury purchases by non-U.S. public and private sector entities. The best evidence of that trend is Japan, he wrote, where Bank of Japan (BoJ) data show government and private Japanese investors becoming net sellers of long-term U.S. debt securities in the 12 months leading up to May 31, following three years as net buyers.  

There is little evidence so far of a “sell America trade,” Karoui said, and demand for U.S. corporate credit remains strong. But issuers may have to pay more for it.

The U.S. federal government must fund a record deficit, and investment-grade corporate issuance in August, typically a slow month, is setting records.

“If Japanese investors are also selling U.S. securities into the market, that’s a lot of selling pressure that could push up U.S. rates,” said Amol Dhargalkar, senior managing director at Chatham Financial, which advises corporates on debt and hedging strategies. U.S. issuers, he added, could see wider spreads on top of a higher benchmark rate.

One indication of further retrenchment by Japanese investors, Dhargalkar said, would be more non-Japanese issuers pursuing yen offerings to take advantage of growing demand for yen-denominated securities. Alphabet and Berkshire Hathaway recently completed large yen offerings, and he anticipates more, especially from companies with Japanese operations that can avoid costly currency hedges.

Another wrinkle is the intervention starting in late July by the Japanese and U.S. governments to counter the yen’s dramatic weakening against the U.S. dollar by selling dollars and buying yen. Further yen appreciation will likely require more rate hikes by the BoJ, according to Aug. 5 commentary by Fitch Ratings, prompting even more yen repatriation.

“This is one of many new avenues that CFOs and their finance teams have to make sure they’re looking at as they consider capital markets transactions,” Dhargalkar said.

John Hintze is a contributing writer based in the U.S.