Japan’s bond market is back in play after decades in the wilderness
Japanese 10,000 yen banknote issued on Thursday, November 2, 2023, in Kyoto, Japan.
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Japanese government bond yields have reached their highest levels in recent years. 10 years Last week it reached levels not seen since 1996.
As Japanese bonds sell off amid concerns about the Bank of Japan’s policy normalization and Japanese Prime Minister Sanae Takaichi’s spending plans, experts say the asset class deserves a second look from investors.
“JGBs are increasingly moving from ‘investment grade’ to ‘investment grade’ for global bond investors,” according to Masahiko Loo, senior fixed income strategist at State Street Investment Management.
Decades of high returns mean investors are “finally” getting paid to own Japanese securities again, Loo said.
The 10-year JGB yield hit 2.901% last Thursday and is currently trading at 2.781%, up more than 70 basis points year-to-date. The yield on 20-year JGBs also rose to 3.901% last Thursday.
JGBs have long been affected by the Bank of Japan’s yield curve control program; The 10-year return target has been set at “around zero” as Japan tries to re-inflation its economy. The country abandoned the YCC in March 2024 as part of efforts to normalize monetary policy.
Charles Gave, co-founder of Hong Kong-based research firm Gavekal, said in a research note last week that Japanese government bond yields are higher than they should be.
“The asset to buy in Japan is an asset that no one owns: Japanese bonds, especially long-term Japanese bonds. The Japanese bond market is probably the most attractive bond market in the world today.”
Gave said that if investors do not have assets in Japan, they should turn to a “balanced” Japan portfolio that includes 50 percent stocks and 50 percent bonds, while other investors should replace gold as well as euros and U.S. bonds with long-term Japanese bonds.
“Very soon Japanese yields will begin to fall and the yen will begin to rise, especially if oil remains at its current price. Long-term Japanese bonds will therefore significantly outperform gold on a yen basis for the foreseeable future,” he added.
But some analysts have a different view on the attractiveness of Japanese bonds.
Henning Potstada, global head of multi-asset at Germany-based asset manager DWS, said other bond markets such as European bonds were still more attractive due to the higher policy rate. Potstada stated that the European Central Bank’s interest rates are 2.25% and the BOJ’s is 1%.
Debt sustainability is more of a concern for Japan as Tokyo’s debt-to-GDP ratio is over 200% compared to 2010, he added in the post. 81.7% for EU. “If your positions in Europe remain in Europe, or even more so, we think they will continue because of debt sustainability issues, and Europe offers exactly the stability for those investors.”
global impact
Lauren Hyslop, chief investment officer at Mattioli Woods, said investors were “selectively” returning to the market as Japanese government bond yields continued to rise.
“Foreign investors have returned to the 20- to 30-year segment as yields rise above 3.5 percent, pouring a record 9.3 trillion yen into longer-dated Japanese debt in 2025 alone,” he said in an email. “The 10-year average is around 2.87%, approaching what most major institutions consider fair value, which is generally in line with Japan’s growth and inflation outlook.”
However, ultra-long positions are “live risk”.
“If 30 years exceeds 4.5%, life insurers become compulsory sellers, so this level is simultaneously an opportunity and a danger zone,” Hyslop said. “GPIF, world’s largest pension fundremains the most important potential buyer, and any reallocation from the $1.8 trillion pool to domestic bonds would be a powerful stabilizing force.”
Hyslop told CNBC that these changes have structural impacts on the global bond market. “Japan spent two decades as a silent supporter of cheap global debt. That era is over,” he said.
Last Friday, Japanese Finance Minister Satsuki Katayama It is said that Tokyo will seek to encourage pension funds, including GPIF, to invest “significantly more in Japanese financial assets.”
According to a Reuters report, there is no immediate revision to GPIF’s medium-term targets as the government explores ways to increase such investments.
“As domestic yields rise, Japanese investors are repatriating capital, selling $29.6 billion of U.S. debt in the first quarter of 2026 alone and removing a historically reliable buyer from markets already grappling with massive fiscal deficits.”
Even though Japan’s 10-year bond yields have reached their highest levels in decades, a “combination of uncertainties” is still deterring nominal demand, John Sidawi, senior portfolio manager of global fixed income at Federated Hermes, told CNBC via email.
“So the emerging fiscal pressures and the general position that the Bank of Japan is still behind the curve [on raising rates]“This dynamic is further exacerbated by Middle East geopolitical tensions, which puts upward pressure on global yields overall.”
