A UK multi-family office has warned investors against holding Japanese government bonds – JGBs – owing to the risk of a sharp price deterioration in the coming years amid the pressure of massive public debt.

The Stonehage Group's comments come at a time when investors such as wealth managers and private banks have generally warned about the risks of holding government debt issued by developed nations, especially in the eurozone and US. But while the fiscal plight of European nations and the US has attracted considerable press attention, Japan has tended not to get quite the same attention. And yet the statistics are troubling, Stonehage says.

“Japan’s debt-to-GDP ratio, at 220 per cent, is almost double that of Italy. Yet the Japanese bond market has not behaved in the same way as in Europe, as domestic investors continue to prop up the country’s bond market,” the firm said in an investment note.

Ronnie Armist, executive director at Stonehage Investment Partners, said: “High levels of domestic household and corporate savings have sustained the issuance of JGBs in recent years. However, as the country’s population ages and continues to draw on its $1.37 trillion public pension fund, the Japanese government will become more and more dependent on external investors (or the Bank of Japan) to support its bond markets.”

“This may result in a rise in yields and a fall in prices as investors question the long-term real value of bonds issued by a country with such a high debt-GDP position. Given the current yield of 1 per cent on 10-year Japanese Government Bonds, we don’t believe this represents a worthwhile investment today,” Armist said.

The warning comes as the yen was put under increasing pressure last week: policy makers pushed for the central bank to ease monetary restrictions after the US Federal Reserve's stimulus measures nudged up the yen against the dollar.

“We hold limited exposure to the yen within our client portfolios. If required, the Japanese central bank could also elect to inflate away its debt burden and this would be a negative for the currency. We are not recommending outright short positions either on yen or on Japanese government bonds as the timing of this outcome is extremely uncertain. However, we are avoiding both of these markets and recommend investors do the same,” Kirsten Giddey, director at SIP, added.

SIP is Stonehage Group’s investment advisory arm and advises $2.4 billion of client money; the Stonehage group advises on $30 billion of assets.