Japan matters

As a component of New Zealand offshore demand and a consistent source of support, Japan remains an important source of funding even though hedged and unhedged investors took a back seat in 2018.

CRAIG Over recent years we have seen the Japanese investor base emerge as a key component of international demand for Australian and New Zealand dollar debt. But challenges have emerged in the past year in particular. What observations do issuers have about the status of this demand in 2018 and going forward?

MARTIN When we look at Japan as a region we consider it to be a very mature investor base. There is consistent support from the Japanese institutional investor that is familiar with New Zealand as an investment destination. I don’t think this changed during 2018.

Even so, we have to accept that returns last year were not as attractive from a hedged investor perspective, and from an unhedged investor basis the decline in the New Zealand dollar relative to the yen was a concern to some.

Anecdotal feedback we have received is that mandates that are dependent on retail demand are probably less interested in New Zealand because retail investors continue to be yield-sensitive and New Zealand is no longer as high-yielding an investment as it has been in the past.

Late last year we heard some concern that the yield on the 30-year Japanese government bond heading back to 1 per cent might be a tipping point where Japanese investors would have less interest generically in offshore investments. However, we’ve since pulled back and the 30-year is sitting at about 0.7 per cent so we did not get to see the proof of that concern.

KIM MARTIN

We have to accept that returns last year were not as attractive from a hedged investor perspective, and from an unhedged investor basis the decline in the New Zealand dollar relative to the Japanese yen was a concern to some.

KIM MARTIN NEW ZEALAND DEBT MANAGEMENT

DIREEN It’s interesting that this is an indicator.

MARTIN It was back in 2016 that the 30-year dropped below 1 per cent for the first time. This coincided with some of the increase in demand for offshore fixed income from the Japanese investor base.

CRAIG At least some of the demand for Australian dollar assets from Japanese investors comes from a natural requirement for the currency, for instance life-insurance policies written in it. Is there a natural need for New Zealand dollars to any comparable extent?

BUTCHER There is also a need but it’s off a much smaller quantum. In the past, offshore investors held New Zealand dollar assets as a form of diversification within their portfolios and received a yield pickup. Now they don’t get the additional yield benefit. There needs to be a very compelling diversification reason for them to invest anyway.

JOHN We have an Australian dollar debt programme and issued quite heavily off it during 2016 and 2017. The issuance was predominantly bought by Japanese life-insurance accounts seeking 10-year-plus maturities. We weren’t actively marketing Kangaroo issuance last year, but even so we saw much less interest from Japanese accounts.