Japanese Investors Eye U.S. Housing Market

For several years now, the mantra has been “America needs more cash in its financial system.”

This is why we have heard so much about “deleveraging” — where banks and investment funds increase the amount of cash relative to borrowed margin; and “liquidity” — where the Federal government buys back bonds to increase the supply of money floating around the economy, driving down the dollar’s value to make it easier and cheaper for American businesses to get their hands on more money at lower interest rates.

Well when you’re desperate for cash, you don’t really care where you get it from — even if it comes from another country.

Japanese investors are comparing interest rates and are finding better offers in the U.S. Cash is now moving from Japan to America, and you can almost hear the sighs of relief coming from the inner chambers of the United States Federal Reserve.

Out of Japan

Following in the U.S. Federal Reserve’s footsteps, the Bank of Japan is on a campaign to lower the cost of money and increase its volume in circulation in order to get more of it into the hands of consumers and businesses. Its recently embarked upon agenda will have Japan’s monetary base doubling within two years.

To accomplish this, the BOJ will be buying government bonds, select ETFs, and Japanese real estate investment trusts, driving up their prices and lowering their interest yields.

The new policy has already begun driving down the value of the yen and the interest earned on income securities. In an effort to preserve their wealth against these eroding effects, many Japanese are moving their investments abroad in a massive exodus of investment capital — much of which is heading into the United States’ economy.

Into the U.S.

At first glance, you might wonder why all this Japanese money would make its way into the American economy, given that U.S. interest rates are not very much better than Japan’s. But recently, the U.S. has gained something Japan is still lacking: a robust housing rebound.

Japan’s housing starts in February showed slowing housing growth, its fourth monthly slowing in a row. U.S. housing starts, on the other hand, are the highest they’ve been in 4.5 years. And they will only pick up steam, as indicated by new home construction permits rising 4.6% over the past 12 months ending in February.

To participate in this American housing recovery, Japanese investments are making their way into U.S. mortgage providers, notably Ginnie Mae, which issues home loans on small deposits as low as 3.5%, complete with a U.S. government-backed guarantee, Bloomberg reports.

Even though home mortgage interest rates in America are not high by any means, they are still higher than in Japan. While the yield from Ginnie Mae’s most common mortgage type fell to 1.49% recently, it is still higher than the Japanese 10-year government bond, which pays only 0.64%.

What is more, U.S. mortgage securities offer fantastic capital gains potential. The shortage of available homes for sale in the U.S. is driving up home prices, which increases the amounts of the loans, which in turn increases the profits of mortgage providers like Ginnie Mae.

It’s enough to attract the Japanese in a big way, with analysts estimating a flow of U.S. $50 billion each year making its way out of Japan and into the American housing market.

A host of other investment vehicles will likewise capture Japanese money migrating west, including U.S. Treasuries, collateralized loan obligations, even securities tied to student loans and credit cards — anything offering a higher interest yield than is currently being offered in Japan.

Yet this migration of investment capital is not simply a short-term play. Given the head start the U.S. has had over Japan in monetary easing and stimulus, the U.S. will almost surely begin raising interest rates before Japan does, making this flight of Japanese cash to U.S. shores a trend that is likely to remain strong for some years to come.

Enough Benefits for All

We can see now why the G-20 countries — despite recently speaking-out against the Bank of Japan’s aggressive plans to weaken its currency — didn’t really do anything about it. They knew that money would flood out of Japan and come to them.

Bill Gross of PIMCo predicts Japanese money will flow into [U.S.] Treasuries and other high-quality markets; Peter Gorra of BNP Paribas sees funds flowing to Europe; while Sebastien Galy at Societe Generale expects a boost to Australian assets, cites Bloomberg. All in a quest for higher income yields.

The U.S. is more than pleased to get some extra liquidity into its system at Japan’s expense, which lends the U.S. Federal Reserve a helping hand. For years, the U.S. government has been spending its own money stocking banks and mortgage providers with a full store of cash to make home buying cheaper and easier, reduce the glut of excess housing from foreclosures, and re-inflate housing values.

Now it is getting some help from Japan’s flight into U.S. housing. If you thought the American housing recovery was coming along nicely before, expect it to clip along at a much faster pace now.

Joseph Cafariello

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