* Japanese investors bought 60 pct or more of French debt in
* Buying up six-fold from last year
* Euro zone a déjà vu for Japanese investors seared by long
* French debt yields more than Germany's, rated higher than
* ECB easing seen as "biggest event of the year" for
Japanese investors, broker says
By Hideyuki Sano
TOKYO, July 14 Japanese investors have been
buying most of France's government debt recently in a record
surge spurred by expectations that Europe faces the kind of
deflation and growth that Japan suffered for decades.
Since the European Central Bank (ECB) signalled in May it
would take radical steps to ease monetary conditions, banks and
other big investors in Japan have piled into French bonds,
convinced from their own experience that the debt of a country
where the central bank is battling deflation represents a
winning bet, market participants say.
"In a way, they are expecting Japanisation - deflation and a
long period of zero interest rates," said Hiroki Shimazu, senior
market economist at SMBC Nikko Securities.
Japanese investors bought a net 1.9 trillion yen (14 billion
euros) of French bonds in May, equal to more than 60 percent of
the government's new issuance that month, Japanese Finance
Ministry data shows.
Data is not available for June, but market participants say
Japanese buying of French bonds has picked up from May amid a
broader increase in buying of euro-zone debt. One suggested
Japanese investors may have bought the equivalent of
three-fourths of the French new issuance.
French bonds represents a Goldilocks trade for Japanese
investors keen for euro-zone exposure: they yield more than
German bonds, while lower credit ratings on Italy's bonds - the
region's third-most-liquid market - deter active Japanese
On a gross basis, Japanese investors bought 6.60 trillion
yen ($65.2 billion) of French government debt in May, dwarfing
last year's 1 trillion yen average and by far the most since the
ministry began compiling such data in 2005.
While the euro zone's financial crisis has seen spikes in
market interest rates as bond prices plunged, Japanese investors
have strong memories of a completely different dynamic.
As Japan suffered years of falling prices and tepid growth,
the government's bond market proved one of the world's great
long-term bull markets.
Having slashed interest rates to zero during this period,
the Bank of Japan invented the now globally recognised idea of
"quantitative easing" - mass purchases of bonds and other debt
to inject cash into the economy.
"If you want to make money investing, you have to take the
largest position you can take on the most important event of the
year - that's how you win," said the Tokyo director of fixed
income at a European brokerage. Japanese investors "think the
ECB's easing is the biggest event of the year."
The ECB under President Mario Draghi has cut rates, pledged
to keep them low "for an extended period" and said it will
continue market operations that allot banks their full funding
requests at a very cheap rate until December 2016.
Japanese investors have taken that as a signal rates won't
rise for more than two years. That means free money by playing
for "roll-down" gains on the yield curve: a five-year bond
bought now at a 0.47 percent yield and held for two
years should rise in price if market rates remain the same,
given that three-year debt now yields 0.08-0.09 percent.
Helped by heavy Japanese buying, the French 10-year bond
yield fell to a record low 1.5 percent last week.
But that is still nearly triple the yield that Japanese
investors can get at home, where the BOJ's massive purchases -
the central bank gobbles up the bulk of domestic JGBs - has
crushed the 10-year yield to a 15-month low of 0.54 percent
The ECB says there is little risk that the euro zone will
slip into deflation, but it is déjà vu for Japanese investors,
where the BOJ's unprecedented easing is only now generating a
modest rebound in prices.
The euro zone inflation rate has slid for three years to 0.5
percent, with Italy at 0.2 percent in June.
Bank lending in the euro zone is falling as companies shed
Wage growth is slowing, with some countries in southern
Europe seeing wages falling.
Japanese investors keenly recall how, during long periods of
stagnation, consumers stuffed their money into bank deposits and
borrowing slumped, leaving banks with little choice but to
plough their cash into Japanese government bonds.
Rising domestic savings boosted Japan's current-account
surplus, supporting the yen and inflaming deflationary pressure
- another parallel with the euro zone now. The euro zone's
current-account surplus hit a record high in January, helping to
support the euro despite the ECB's attempt to talk it down.
(Editing by William Mallard and Neil Fullick)