Foreign investor holdings of JGBs (Japanese government bonds) were down to 6.4% or JPY43 trillion, the lowest since September 2007. US and German holdings are apparently down by over half, while UK and French holdings are down some 30%. This is despite a major investor relations program by Japan's Ministry of Finance since 2005 to promote holdings of JGBs by foreign investors. This program included foreign road shows, one-on-one meetings with investors, and other promotion activities, which had helped raise foreign holdings of JGBs from 3% at the end of 2003 to a peak of 7.7% in September 2008.

The lack of appetite for JGBs comes at an awkward time for the Japanese government, as they have just revised up their JGB issue calendar for 2009 to reflect the additional funds needed for the JPy15 trillion stimulus package. To fund this package, repay maturing bonds and plug the revenue holes in the annual budget, the MOF is planning to issue JPY149.2 trillion of new JGBs in 2009, JPY134.3 trillion of which will be procured on the open market. The BOJ will absorb only around JPY10.7 billion. With government bonds, FILP (fiscal investment program) bonds, borrowings and financing bills and government guarantees reaching JPY891.9 trillion, the lack of JGB buying appetite by foreigners temporarily pushed 10-year JGB yields to the 1.5% level.

JGB yields have since settled back to the 1.3% level as it became clear that domestic financial institutions would be able to take up the slack from foreign selling, which had reached JPY700 billion in April and was upwards of JPY1.5 trillion in May. This is because domestic banks and insurance companies are awash in cash that they are having trouble loaning out at profitable rates. The excess cash is coming from substantial inflows of individual savings into bank time deposits, which as of the end of May 2009 were growing 4.9% YoY and had reached JPY195 trillion, compared to a low of JPY170 trillion in 2006. At this pace, the amount of savings in time deposits could surpass the previous high of JPY201 trillion set in January 2001. Indeed, the recent inflows into bank time deposits are exceeding JPY1 trillion/month. Domestic bank holdings of JGBs at the end of March 2009 had swelled to 41.5% of outstanding JGBs, versus only 17.9% in 2007, and life/non-life insurer holdings had risen to 19.7% of outstanding from 9.1% in 2007. Public pension's share of outstanding JGBs has also risen to 11.9% from 10.5% in 2007.

On the other hand, the proportion held by the BOJ has dropped from 9.8% to 8.2%, of foreigners from 6.6% to 6.4% and of private pension funds from 4.2% to 3.8%. The individual saver funds flows into bank time deposits come as tremendous market volatility and forex swings (strong yen) has individual savers backing away from the once very popular foreign currency-denominated investments.

These investments are slowly coming back, while the inflows also appear to be the result of a continued high level of cash payouts to retiring baby boomers which a couple of years ago was supposed to come flowing into equities as Japanese individual investors took on a higher risk profile. Well, the global financial crisis has taken care of that. This notwithstanding, individual investors have been net buyers of Japanese equities year-to-date by some JPY742.8 billion, helping to offset the net JPY1,554.7 billion net selling of Japanese equities by foreign investors.

Like the US, however, 30-yr JGB yields continue to climb (prices declining) on slack demand as even domestic institutions have a preference for lower shorter maturies with less holding period risk.