Japanese investors are buying Asian assets like never before as Prime Minister Shinzo Abe’s policies make the yen a lucrative means to fund bets on regional growth.

A net 1.82 trillion yen (US$15.4 billion) flowed into stocks and bonds in the rest of Asia in the first nine months of 2014, 76 percent more than the previous record in 2007, data from Japan’s Ministry of Finance show.

Borrowing in yen to invest in the 10 currencies that make up the Bloomberg-JPMorgan Asia Dollar Index returned an annualized 13 percent this year through yesterday.

That beat so-called carry trades funded in euros and dollars, which gained 11 percent and 0.3 percent, respectively.

Abe’s unprecedented stimulus to fuel inflation has boosted Asian markets, providing them with a buffer against potential outflows as the US prepares to raise borrowing costs next year.

Inflows to the world’s fastest-growing region are also being bolstered by the People’s Bank of China’s Nov 21 decision to cut interest rates for the first time since 2012, and as the European Central Bank considers further monetary easing.

“Japanese investors caught the same grab-for-yield bug that investors everywhere caught,” Tim Condon, head of Asian research at ING Groep NV in Singapore, said in a Nov 24 interview.

“With the PBOC joining the Bank of Japan in increasing accommodation, and the ECB expected to join, the grab for yield looks set to persist in 2015.”

Yen slide
The yen has tumbled at least 16 percent versus all its 16 major counterparts in the past two years as Abe implemented his three policy “arrows” of monetary easing, fiscal spending and structural reform, designed to revive the economy and end two decades of deflation.

Japan unexpectedly sank into a recession in the last quarter and consumer-price gains slowed in September for the fourth month in a row.

The policies, known as Abenomics, pushed local government bond yields to among the lowest globally, prompting Japanese investors to seek higher returns abroad.

Asia received almost six times more inflows from Japan in the first nine months of this year than the average over the past decade, compared with the 2.6 times for Central America and 1.3 times for North America, finance ministry data show.

Outflows are set to increase after Japan’s US$1.1 trillion Government Pension Investment Fund, the world’s largest, said on Oct 31 it increased allocation targets for overseas equities to 25 percent from 12 percent and for debt to 15 percent from 11 percent.

The fund, which plans to add more Japanese stocks and reduce local bonds, must be ready to buy more shares should Abe’s policies succeed, Tokihiko Shimizu, director general of GPIF’s research department, said in an interview yesterday.

‘So low’
The BOJ said on Oct 31 it will boost holdings of Japanese government bonds by 80 trillion yen a year, up 60 percent from the prior pace.

“There’s going to be a scarcity of domestic bonds in Japan,” Greg Gibbs, the head of Asia-Pacific markets strategy at Royal Bank of Scotland Group in Singapore, said in a Nov 21 interview.

“Yields are so low that it’s generating outflows.”

The yield on Japan’s 10-year sovereign bonds reached an all-time low of 0.315 percent in April 2013. It was 0.423 percent yesterday, exceeding only Switzerland’s 0.349 percent.

Emerging Asia’s sovereign debt returned 8.6 percent this year, outpacing the 3.1 percent gain in Japanese notes, Bloomberg indexes show.

The region’s corporate debt handed investors a gain of 7.5 percent, compared with 1.3 percent on Japanese bonds, according to Bank of America Merrill Lynch indexes.

Stock gauges in Indonesia, India, and Thailand jumped at least 20 percent this year, outpacing the 6.9 percent advance in Japan’s Topix index.

Stocks preferred
Japanese investors have accumulated about US$30 billion of overseas equities since mid-June, UBS said in a Nov 13 research note.

They prefer stocks to bonds because yields are low even outside Japan, said Masashi Murata, Tokyo-based currency strategist at Brown Brothers Harriman & Co.

“Indonesia, the Philippines and India are likely to be the destinations of Japanese flows,” Murata said in a Nov 20 interview.

“They benefit from the US recovery and have medium- to long-term growth prospects.”

The world’s largest economy grew at a 3.9 percent annualized rate in last quarter, faster than an initial estimate of 3.5 percent, the US government reported on Nov 25.

Asia’s developing economies will expand 6.6 percent next year after growing 6.5 percent in 2014, the International Monetary Fund forecast in October.

That compares with 2015 estimates of 3.1 percent for the US and 0.8 percent for Japan.

Japanese investors bought a net 11.3 trillion yen of global equities and debt this year, finance ministry data show. That’s 20 percent more than the average since 2005.

Malaysia, China
Malaysia, Hong Kong and China were the top Asian recipients, each getting more than 230 billion yen through September.

Central and South America had the biggest net inflows of 4.95 trillion yen.

North America got 3.84 trillion yen, driven by 3.36 trillion yen of investments in the US.

“If the other emerging markets stabilize, it could draw some flows out from Asia,” Khoon Goh, a Singapore-based strategist at Australia & New Zealand Banking Group, said by phone yesterday.

“We’ve had geopolitics turning investors off Russia and Emerging European assets, and weak growth coupled with political uncertainty impacting Latin America.”

Faster US growth and the prospect of the Federal Reserve raising interest rates will also make the US a more attractive investment destination, Goh said.

Nomura Holdings estimates Japanese investors will pump US$34 billion into Asian stocks and bonds over the next two years provided the nation’s pension funds meet their investment targets.

Hong Kong, South Korea and India will be the top destinations in the region, Nomura said in a Nov 24 report.

“The region’s economies continue to perform well and generally exhibit strong economic fundamentals,” Thiam Hee Ng, a senior economist at the Asian Development Bank in Manila, said in a Nov 20 interview.

“Once Japanese investors get more familiar and comfortable with other markets, they will increasingly see Asia as a useful diversification play.”