May 30, 2013 / 7:43 AM / 4 years ago

Japan fund managers cut JGB weighting to an 18-month low

TOKYO (Reuters) - Japanese fund managers cut their allocations for Japanese bonds to an 18-month low in May, while lifting their exposure to domestic stocks, suggesting risk appetite is growing due to the government's 'Abenomics' policies, a Reuters poll showed.

The survey of 10 Japan-based fund managers, polled between May 15 and 22, showed the proportion of domestic bonds in their debt portfolio fell to 35.0 percent from 36.3 percent in April, in the wake of an audacious bond-buying program from the Bank of Japan.

Their domestic stock allocation climbed 0.1 percentage point to a 9-month high of 36.4 percent. The Nikkei .N225 has, however, been hit hard since the poll closed, losing 13 percent due in part to volatility in the Japanese debt market, as well as worries that its recent gains were too steep.

The poll also showed that the fund managers have gone heavily overweight in their overall equity allocations at the expense of bonds, encouraged by surging stock markets in the United States and Japan.

Overall stock allocations climbed to a six-month high of 41.8 percent from 39.8 percent a month earlier, while their overall bond allocations fell for the first time in 3 months to 52.2 percent from 52.7 percent.

Spurred on by Prime Minister Shinzo Abe, the Bank of Japan announced a radical policy overhaul in April, aiming to reach 2 percent inflation in two years and committing to buy around 7.5 trillion yen in debt per month, which amounts to about 70 percent of new government debt issuance.

BOJ Governor Haruhiko Kuroda has said this is aimed at pushing yields down across the curve. He has also acknowledged that the change in policy could cause some investors to rebalance portfolios.

But confusion has engulfed the Japanese government bond market ever since. The benchmark yield on 10-year JGBs dropped to a record low of 0.315 percent on April 5, only to soar to a one-year high of 1.000 percent on May 23. It was at 0.870 on Thursday.

"The bond market just won't settle down. People are worried the BOJ's policy will not be able to bring down bond yields beyond those with a two-year maturity, if they reach their goal of two percent inflation within their specified time," said Yuichi Kodama, chief economist at Meiji Yasuda Life.

The drop-off in JGB holdings helped the weighting for U.S. Treasuries increase by 1.4 percentage points to 29.6 percent. Allocations for sovereign bonds from the euro zone, the U.K., Latin America and the rest of Asia were barely changed from April.

Fund managers went the most overweight on stocks in at least three years as the S&P 500 .SPX and Dow .DJI indexes in the United States continued to run up record highs and Japan's Nikkei .N225 extended its Abenomics-driven rally to notch up a 80 percent gain from mid-November to May 22, the deadline for the poll's responses.

The managers rated their May equity holdings as overweight at +1.5 on a scale of -3 to +3, a large jump from +0.7 in April, while rating their bond holdings underweight at -1.2 compared with -0.3 a month earlier.

Some market participants taking part in the poll said that the bullish Japanese stock market and the trend for a weaker yen are set to continue, supported by expectations that concrete benefits of 'Abenomics' will be felt in the real economy soon.

Kenichi Kubota, a senior strategist at Tokyo Marine Asset Management, noted that more steps from Abe were due in June and that upper house elections in July should help resolve deadlock in parliament.

"I think that will help to sustain the rally," he said.

Editing by Edwina Gibbs

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