"Japanese Government Bond Yield Hits 30-Year High... Luring Funds Back Home"

▲ US Dollar and Japanese Yen

As the yield on 10-year Japanese government bonds reached a 30-year high, it has begun to draw Japanese capital—which has long supported the global bond market—back home, Reuters reported.

Analysts note that the 10-year Japanese government bond yield breaking through 3 percent is significant not only for domestic fundraising in Japan, but also because it reverses investment flows that made Japan the largest holder of US Treasuries and a reliable buyer of government bonds worldwide.

Reuters reported, "While there are no signs of a panicked sell-off of Japan's 2.4 trillion dollars (approx. 2,200 trillion won) in overseas bonds, global asset managers and data show a steady repatriation of funds is underway."

Bond dealers and fund managers in Sydney, London, and Singapore echoed that they are already witnessing a slowdown in Japanese demand.

Official data also shows that Japanese investors net sold more than 3 trillion yen (approx. 26 trillion won) in overseas bonds from the beginning of the year through August 22.

This marks the largest year-to-date volume since 2022, when the bond market crashed.

Michael Weidner, co-head of global fixed income at Lazard Asset Management, pointed out, "Japanese investors have been underweight in yen-denominated securities for 25 years."

"Now yen-denominated assets are starting to look attractive, and they are reallocating their capital," he added.

Toshinobu Chiba, a fund manager at Simplex Asset Management in Tokyo, also stated that he began buying 10-year Japanese government bonds just before yields peaked recently.

"Once the 10-year Japanese government bond yield exceeds 3 percent, it is easy to buy," he said. "Most Japanese life insurers have a strong incentive to buy now."

"It is a natural movement for Japanese investors to withdraw funds from the US and bring them back to Japan," he added.

A shift in sentiment is also noticeable in the Australian bond market, where Japanese funds were the largest major players until the pandemic.

Ryan Ellis, head of Australia and New Zealand market sales at Citigroup, analyzed, "For the first time in years, a home-country bias is appearing among Japanese investors, and this is entirely due to yields."

Global bond markets briefly shook last July when the possibility was raised that the Government Pension Investment Fund (GPIF) of Japan, which holds 1.8 trillion dollars, might alter its portfolio toward domestic assets.

However, there are still no signs of the Government Pension Investment Fund adjusting its portfolio.

In a survey conducted by JPMorgan Asset Management of 82 corporate pension funds in Japan, the percentage of respondents planning to increase their domestic bond holdings reached the highest level since the survey began in 2008.

The 10-year Japanese government bond yield hit 3 percent on September 1 for the first time since 1996.

In September 2024, the yield was around 0.8 percent, meaning it has surged more than threefold over the past two years.

Over the same period, the 10-year US Treasury yield rose by only about 1 percentage point, narrowing the interest rate gap between the two countries by more than 100 basis points.

In effect, Japanese buyers who used to purchase overseas bonds such as US Treasuries are dwindling.

Reuters reported, "Some are holding back on domestic investments in Japan because their overseas positions are currency-hedged and Japanese yields are not yet stable," adding, "The overseas positions that Japanese investors have built up over decades will not change overnight."

At the same time, it projected, "With major global economies burdened by excessive debt and growing exchange rate risks, the domestic market is becoming a more attractive option than ever for Japanese investors."

Masahiko Loo, senior fixed income strategist at State Street Global Advisors in Tokyo, evaluated, "The key point is not a massive repatriation of capital, but rather that Japan is gradually ceasing its role as a major investor providing incremental buying power in overseas bond markets."

"With additional demand shrinking from one of the world's largest pools of savings, it is helping drive up term premiums globally," he noted.

(Photo: Yonhap News)

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