(News Bulletin 247) – The outstanding French bonds held by Japanese investors melted up to 30 billion euros in 2024, according to Barclays. This movement is notably linked to political uncertainty in France. However, these transfers do not constitute alert signals on tricolor debt.

Reputed to be fond of a tricolor debt, Japanese investors turned away from French paper in the last quarters.

Manager at Eleva Capital and regular guest of BFM Business, Stéphane Deo noticed on X (ex-Twitter) that the French debt outstanding held by investors in the country had been divided by almost two since its 2019-2020 peak.

“It seems that the appetite of Japanese investors for French debt is falling as a result,” concludes the manager.

This trend accelerated in 2024. According to data collected by Barclays and cited by the bank on February 10, Japanese investors made net sales (reduced sales of sales) of French bonds up to 4.700 billion yen, or 29.7 billion euros, over the whole of 2024.

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The political uncertainty in question

Obviously, this movement is not unrelated to the period of political instability that France has been going through since the dissolution of the National Assembly, in mid-June 2024. This episode caused significant uncertainty which created tensions on French debt, on the secondary market, and led the CAC 40 to underform the other major action indices in 2024.

In a note written last December, UBS noted that Japanese investors had sold, net, for more than 20 billion euros in assimilable bonds of the French Treasury (OAT) over the period alone from June to November.

“The transfers of French bonds on the part of Japanese investors in 2024 still translated a form of distrust of political uncertainty in France. What has not necessarily been found with the other countries in the euro zone,” explains Axel Botte, chief of market strategy at Ostrum Am.

This load shedding on the part of Japanese investors is not to be taken lightly, insofar as French debt is more owned by foreign investors than in other countries. According to data from the Banque de France, 54.2% of the French debt outstanding was held by non-residents at the end of September 2024. In comparison, these detention rates are rather around 28% for Italy, 30% for the United States, 40% for Spain and 45% for Germany, according to Reuters.

Japanese bonds become attractive

Should we be concerned about the leak of Japanese investors? Not necessarily.

If French political uncertainty prompted them to reduce the wing, Japanese investors have also simply redirected their funds to domestic debt.

For years, Japan has experienced almost naked (even negative) inflation accompanied by ultra-basic guiding rates. Japanese investors had to look abroad to find bonds offering performance. And so place their money.

But the situation has recently changed. Japan has come out of its deflationary spiral. In December, inflation excluding food has been 3% over a month. And after years of ultra-accommodating monetary policy, the Bank of Japan began to raise its rates, bringing its main rate to 0.5% in January. Bank of America estimates that two a quarter -point rate increases will still occur in 2025, which would bring this rate back to December.

As a result, Japanese bond yields have come back, making Japanese debt more attractive. While it was still evolving around 0% or almost at the end of 2021, the rate of the Japanese bond at 10 years increased to 0.6% at the end of 2023 and is around 1.38% currently.

“Consequently, they have less appetite to seek yield abroad, explains Axel Botte. Especially since, in their calculations, Japanese investors must take into account the cost of foreign exchange covers in the Bonds in the euro zone. However, these costs are still high and can be very penalizing,” he adds

“Investors have certainly relied on French bonds in a significant way but this is part of a broader movement. Japanese investors have, in reality, sold foreign assets all over the place and have reallocated funds to their domestic assets, because the rates go back to Japan, which makes Japanese assets more interesting”, abounds Vincent Juvyns, market strategist at Jpmorgan.

Moreover, if he concerned France in the first place, the load shedding of debt titles by Japanese investors took place on the entire euro zone last year. According to Barclays data, these investors sold, in net, for 8,600 billion yen (54.3 billion euros) of monetary zone in 2024, including 2,100 billion Dutch debt, 900 billion yen of German debt and 700 billion yen of Italian debt.

An exaggerated weight?

In addition, it is not certain that Japanese investors have such a critical weight in the detention of French debt. The France Trésor agency does not specify the ventilation of the holding of tricolor obligations per country.

But in a last June study devoted to the influence of Japanese demand on the OAT, Barclays put into perspective. “The holding of French bonds by Japanese investors is low compared to the outstanding French debt,” wrote the British bank. “However, given that we have monthly data on purchases/net sales of Japanese investors per country, this usefully illustrates the impact of political uncertainty on the behavior of investors,” she added.

In its note last December, UBS featured that France has more difficulty convincing foreign investors to absorb the increase in its financing needs in 2025. But the Swiss bank recognized that France had an undeniable asset: it has “a large basis of institutional investors” on its debt, which constitutes a factor of stability.

In addition, the main barometer of market confidence on the tricolor signature, the return on the obligation at 10 years with Germany, remains under control. This “Spread” is currently at 68 base points (0.68%), far from the 90 base points it had reached last fall.

“‘As for the current Spread, there is nothing worrying and the tensions have appeased on French debt. This does not mean, however, that public finances have been cleansed or that political instability has disappeared,” explains Vincent Juvyns.

In addition, “the last French debt auctions went very well and investors have more than widely responded. They are looking for yield and French obligations offer it,” he adds.

“For the time being, the contractual awards by France, as for most of the European countries, have gone well. The demand of the market for sovereign debt remains high,” also Axel Botte.

During the latest medium -term OAT broadcast by the France Trésor agency, on February 6, investors’ demand represented, on average 3.16 times the supply.

Ultimately, “these sales of sales of French bonds by Japanese investors are not very worrying. But this certainly constitutes a subject of concern for AFT which is anxious to maintain the widest possible basis of foreign investors,” concludes Axel Botte.