Japan’s 10-year government bond yield has climbed above 3 per cent for the first time since 1996, prompting signs that Japanese investors are beginning to redirect money from overseas debt back into their home market.
The shift is being watched closely across global financial markets because Japan has long been one of the world’s biggest buyers of foreign government bonds, including US Treasuries, French debt and Australian securities.
As bond prices fell and yields rose worldwide on Wednesday, traders said expectations of weaker Japanese demand were adding to pressure on international borrowing costs. There has been no evidence of a sudden liquidation of Japan’s estimated $2.4 trillion (£1.8 trillion) overseas debt holdings, but data points to a gradual withdrawal.
Japanese investors sold a net 3 trillion yen (£14.6 billion) of overseas debt in the period to August 22, according to official figures cited by Reuters. It was the largest year-to-date outflow since the global bond sell-off of 2022.
Michael Weidner, co-head of global fixed income at Lazard Asset Management, said Japanese investors had been “underinvested in yen securities for probably 25 years” and were now reallocating as domestic returns improved.
The rise in yields has made Japanese government bonds more competitive after years in which domestic returns were exceptionally low. The 10-year yield has more than tripled over the past two years, while the gap with equivalent US Treasury yields has narrowed by more than 100 basis points.
A Ministry of Finance auction held on Tuesday underlined the change in market conditions. The average yield on the 10-year notes sold was 2.995 per cent, while the yield at the lowest accepted price reached 3.011 per cent.
For Japanese pension funds and insurers, the attraction of domestic bonds is strengthened by the cost of protecting overseas investments against currency movements. A survey of 82 corporate pension funds by JP Morgan Asset Management found that the net proportion planning to increase holdings of Japanese bonds was the highest since the survey began in 2008.
The same survey indicated that the funds were continuing to reduce their exposure to overseas debt, as hedging costs remained elevated. Masayuki Nakajima, a senior strategist at Mizuho Bank in London, said rising Japanese yields could encourage a move back into domestic fixed income on a currency-adjusted basis.
Japanese investors reassess overseas bond holdings
The potential change is particularly significant for the US Treasury market. Japan is the largest foreign holder of US government debt, and its insurance companies, banks and pension funds have been important sources of demand in international bond markets.
Ryan Ellis, Citi’s head of markets sales for Australia and New Zealand, said Japanese investors in Australia had shifted from actively building positions to largely maintaining existing exposures. He described the change as a return-driven decision, with investors showing a stronger preference for their home market.
The focus has also turned to Japan’s Government Pension Investment Fund, one of the world’s largest pools of retirement savings, with assets of about $1.8 trillion. There is no indication that it has changed its overall portfolio, but the prospect of a future move towards domestic assets unsettled global debt markets in July.
Japan’s bond yields have been pushed higher by expectations of further monetary tightening from the Bank of Japan, as well as Prime Minister Sanae Takaichi’s plans for increased government spending. The central bank is due to hold its next policy meeting on September 17 and 18.
Finance Minister Satsuki Katayama declined to comment directly on the 3 per cent threshold on Wednesday, while reiterating the government’s commitment to appropriate debt management.
The consequences for currency markets remain less certain because many overseas investments are hedged. Analysts also caution that portfolios built up over decades will not be reversed quickly.
But the gradual disappearance of Japan as a marginal buyer of foreign bonds could still have a broad effect. With governments across major economies carrying heavy debt burdens, reduced Japanese demand may leave other borrowers facing higher long-term financing costs.
