As financial and political instability grows in France, Japanese investors are reducing their holdings of French bonds. Some asset management firms have shifted funds to German bonds and shorter-term Japanese bonds, while life insurance companies are also considering reducing their holdings. This movement comes in anticipation of further declines in bond prices ahead of France's budget review and next spring's presidential election.
According to the Nihon Keizai Shimbun (Nikkei) on October 20, Shinji Kunibe, chief fund manager at Mitsui Sumitomo DS Asset Management, stated that they have significantly reduced French bonds in discretionary funds, moving to "German bonds and relatively short-term Japanese bonds." He expects the French budget to pass by the end of the year but aims to secure short-term profits in anticipation of renewed market instability ahead of the election.
Yukinari Skada, a fund manager at Asset Management One, also adopted a strategy earlier this month of selling French bonds and buying German bonds, believing that the yield gap between French and German bonds will widen. He noted that factors such as the budget review and the upcoming presidential election are likely to push French yields higher, reinforcing his confidence in the strategy to sell French bonds.
As of last year, Japanese investors held approximately 23.8 trillion yen (about $199.5 billion) in French bonds, a larger amount than their holdings of about 10 trillion yen in German bonds and 9 trillion yen in Italian bonds.
The yield on France's benchmark 10-year bonds rose from around 4.1% at the end of August to nearly 4.99% on October 2, marking a 24-year high. Rising bond yields indicate falling bond prices. While major countries' yields have been increasing since August due to inflation and fiscal concerns, France's rise has been particularly pronounced. On October 19, yields briefly approached 5% during trading. The Nikkei reported that large-scale protests occurred across France over the weekend, with some instances of violence and looting, heightening concerns over political and fiscal instability. This led to an increase in the selling of French bonds on October 19.
In the foreign exchange market, caution regarding the situation in France is also evident. On October 14, the euro-dollar exchange rate fell to just above $1.11, the lowest level for the euro since May 2025. On October 19, it dipped to around $1.118 before trading around $1.12.
Investors are particularly focused on the upcoming budget review. The French government has proposed a budget that aims to reduce the fiscal deficit to 5% of GDP, but it lacks a majority in the lower house, making negotiations with opposition parties inevitable. Political uncertainty is also significant, as Marine Le Pen's far-right National Rally (RN) is leading in polls ahead of next spring's election. The first vote on the budget's revenue section is scheduled for October 20. The French parliament has failed to process the budget in the past two consecutive years.
Osamu Tanaka, chief economist at Dai-ichi Life Asset Management, analyzed that "the government will need to negotiate with both the left and right, and there is a possibility that fiscal plans could be rolled back." The Nikkei noted that even if interest rates stabilize temporarily in the market, fundamental concerns remain unresolved, and there are predictions that the yield on French 10-year bonds could exceed 5% two or three times before the election.
Japanese private banks and insurance companies are also reassessing their investment strategies. Rinto Maruyama, chief interest rate and foreign exchange strategist at SMBC Nikko Securities, reported an increase in inquiries from clients, including Japanese private banks and life insurers, asking whether they should sell French bonds and buy Japanese bonds. He anticipates that if French yields rise again and Japanese bonds remain stable ahead of the financial year-end in December, funds may return to Japanese bonds.
However, the Nikkei reported that there is not a widespread belief in the market that a repeat of the European debt crisis seen in the early 2010s is likely. Nonetheless, investors are wary of the potential shock if such a scenario were to materialize, even if the likelihood is considered low.
* This article has been translated by AI.
Copyright ⓒ Aju Press All rights reserved.