The Rise of Japanese Government Bonds in the Collateral Highway

In recent times, Japanese Government Bonds (JGBs) have emerged as the fastest-growing asset class in the collateral highway. Jan Grauls, product manager of collateral management services at Euroclear, explores the factors behind this trend.

Introduction

JGBs are highly rated and highly liquid securities. They have historically been held and traded domestically, with most of Japan’s outstanding debt issued in the domestic market. However, over the past decade, the perception of the JGB market as being entirely domestically focused has changed. As a result, the Bank of Japan (BOJ) has undertaken an extensive quantitative easing program by outright purchasing JGBs.

Factors Driving the Trend

Both macro and micro factors are behind the increased use and acceptance of JGBs in the collateral highway.

Macro Factors

• The fiscal, monetary, and structural reforms enacted under the Abenomics regime have fundamentally changed the Japanese economy.
• Japanese financial institutions have been going out while foreign financial services firms have come in, leading to JGBs assuming a more significant role in capital structures and general financial operations.
• As a result of these developments, JGBs have assumed a much more significant role in capital structures and general financial operations worldwide.

Micro Factors

• The global demand for highly liquid collateral for margining has increased dramatically in recent years.
• JGBs are highly rated and highly liquid securities in much greater supply than many alternatives, such as US Treasuries.

Related Facts

• According to the BOJ’s latest Flow of Funds Accounts, the central bank owned JPY 535.62 trillion (USD 3.92 trillion) of JGBs by market value in September 2022. This represented 50.3% of the total JGB issuance of JPY 1.07 quadrillion.
• The BOJ’s yield curve control policy aims to keep the 10-year part of the yield curve from rising too much in the face of recent rate hikes.
• Foreign holdings of JGBs have been steadily increasing over the past decade, rising from 5.7% in March 2010 to 14.1% in December 2022.

Key Takeaway

The rise of JGBs in the collateral highway is not accidental but the result of a combination of macro and micro factors. The world’s demand for highly liquid collateral has increased dramatically with the growing need for high-quality liquid assets for margining. Thus, JGBs have emerged as a highly rated, highly liquid asset class for collateral management services at Euroclear and elsewhere.

Conclusion

JGBs are here to stay as a significant asset class in the collateral highway. Their increasing use and acceptance as collateral worldwide are based on macro and micro trends unlikely to change anytime soon. Therefore, investors and financial institutions should be aware of the growing importance of JGBs and consider them part of their investment strategy.