Japan's Biggest Emerging-Bond Fund to Invest in India on Stronger Rupee

PineBridge Investments Japan Co. said its 160 billion-yen ($1.9 billion) bond fund will start to invest in India next year on expectations the nation’s currency will appreciate.

The firm’s Blue Ocean fund is Japan’s biggest that invests in sovereign bonds in emerging economies without letting customers choose in which currency to invest, according to data compiled by Bloomberg. Investment in India is expected to start in 2011 with an initial allocation of at least 5 percent of the fund’s assets, or about 8 billion yen, said Kazuya Sugiura, managing director at PineBridge’s fund-business development division.

“India is undoubtedly an important country,” Sugiura said in a Nov. 17 interview in Tokyo. The rupee “is moving in almost the same way as the U.S. dollar, but I think the time will come when it starts to move differently.”

Prolonged deflation in Japan enhances the value of fixed payments from bonds, boosting demand for government debt and driving down its returns. While the Bank of Japan maintains interest rates almost zero to boost lending and combat deflation, its Indian counterpart has lifted borrowing costs six times this year to contain inflation.

India’s rupee has depreciated 7.6 percent versus the yen this year, while the dollar has lost 10 percent. Yields on India’s 10-year bonds are seven times higher than similar- maturity Japanese debt.

Sovereign Ratings

Japan’s investments in overseas debt have reached a net 22.3 trillion yen this year through September, exceeding a yearly total of 13.3 trillion yen in 2009, reports from the Ministry of Finance show. Purchases of Indian securities amount to a net 100 billion yen this year, more than any annual total on record dating back to 2005.

Other investment opportunities for Blue Ocean lie with Indonesia and Turkey, whose sovereign ratings may be raised, Sugiura said. There are investors who avoid countries with a rating of BB or lower, and a rating upgrade will spur their purchases, he said.

“Indonesia’s rating may be lifted in 2012 or 2013 if everything goes smoothly,”Sugiura said. “The countries’ interest rates are high and their economies are robust despite some problems.”

Indonesia and Turkey are rated BB by Standard & Poor’s Ratings Services. Turkish securities accounted for the biggest portion of the fund’s asset, or 12 percent, as of Oct. 20, followed by Brazil’s 11 percent, according to the company’s report. Indonesian debt made up 9 percent.

Shift from Latin America

Last month, Brazil raised tax on foreigners’ investments in fixed-income securities to prevent the currency’s appreciation and safeguard export growth. Japan’s purchases of Brazilian debt rose to a net 882.4 billion yen this year through September, reports from Japan’s Ministry of Finance show. That exceeded a 12-month total last year, the most on record since 2005.

“The fund’s allocation will shift from Latin America to Asia to a certain extent,” Sugiura said. “I’m expecting Asian countries to play an increasingly important role in Blue Ocean.”

The International Monetary Fund projects 1.5 percent growth in Japan’s economy next year, and 8.4 percent for India. Turkey’s economy may expand 3.6 percent, compared with 6.2 percent for Indonesia’s real gross domestic product, according to the IMF.