A great asset migration is taking place in Japan. Yet as investors reallocate their overseas capital from bonds to stocks and unwind yen-funded carry trades, they’re also deepening France’s sovereign debt crisis.
Some funds at Sumitomo Mitsui DS Asset Management have sold their entire holdings of French government bonds amid concerns about the European nation’s fiscal situation, shifting capital to the safer German bunds and short-term Japanese government notes instead. Japan is one of France’s largest creditors, holding 5.2% as of 2025, according to Dutch bank ABN-AMRO.
Sumitomo Mitsui is by no means an outlier. In recent weeks, Japan has been undergoing a massive reshuffling of its foreign holdings. In August, Japanese investors poured 1.3 trillion yen ($8.2 billion) into foreign equities while cutting overseas fixed income investments by 1.1 trillion yen, the biggest shift in five months . While stock buying has slowed since, bond selling has only picked up pace.
Against this backdrop, France’s sovereign debt — which reached 119% of its gross domestic product — is an easy sell. The country now pays more to borrow than former debt hotspot Italy, prompting worries of further credit ratings downgrades . Meanwhile, the European Central Bank is unlikely to step in unless there is widespread contagion: It will be hoping that market pressure will help the French government push through a budget that lowers its fiscal deficit.
What this means is that the French spread over German bunds could widen well beyond the current 140 basis points in the run-up to its presidential election next April. Asset managers have looked at Rome’s political uncertainty for historical comparison : Italy’s bond spread widened by more than two percentage points following an inconclusive general election in 2018, when populist parties surged in favor. If you are a Japanese investor capable of earning 3% risk-free at home, why would you want exposure to volatile French politics?
In addition, while selling US Treasuries is becoming a political problem — as the White House has made clear — offloading European debt is still a purely financial decision. Japanese investors sold French government bonds en masse as recently as July 2024 when elections left the parliament in political gridlock . They will do it again as long as they feel that one of Europe’s safest assets is tarnished.
France is starting to experience the kind of refinancing headaches that emerging markets are all too familiar with. With much of its spending funded by foreigners, the European nation is vulnerable to hot money outflows. Foreign ownership of government debt has been steadily creeping up since the Covid-19 pandemic, to 57% as of 2025 year-end, versus Italy’s 33%, according to Bloomberg Intelligence. Yet France still behaves as if it is a prime investment destination. The 2027 budget plan, which aims to reduce fiscal deficit to 5% of GDP, is higher than those proposed by developing nations such as Indonesia .
Holding more than $10 trillion in foreign assets, Japanese investors move global markets. To put their scale into perspective, the country receives about $250 billion in investment income alone every year, with the bulk reinvested abroad. They frequently have to make billion-dollar decisions.
Now that global bond yields are on the rise, challenging long-held assumptions about which assets are truly safe havens, Japanese money managers will naturally want to revamp their portfolios. Some capital will be repatriated, while the rest will be reallocated. France — and the rest of Europe — can no longer take this dependable source of capital for granted.
More From Bloomberg Opinion:
- Soaring Yields Find Europe’s Weak Spot : John Authers
- Hermes Should Make It Harder to Get a Birkin : Andrea Felsted
- UBS Is Headed for Radical Change : Paul J. Davies
Want more Bloomberg Opinion? OPIN <GO> . Or you can subscribe to our daily newsletter .