With benchmark Japanese bond yields breaking through a three-decade-old barrier, higher returns are starting to tease capital home, reversing what was once a dependable flow of funds into global bond markets. The three per cent threshold is significant not just for funding costs in Tokyo, but for turning around an investment flow that has made Japan the biggest owner of U.S. Treasuries and one of the most reliable buyers of sovereign debt worldwide. As the global bond rout deepened on Wednesday, traders said part of the move rested on bets Japanese investors would retreat from overseas holdings. While there’s no sign of Japan dumping its US$2.4 trillion hoard in overseas debt just yet, global fund managers and a growing body of data is showing a steadier drawdown is underway. In Sydney, London and Singapore, bond dealers and asset managers have noticed the pullback of Japan’s demand. Official data shows Japanese investors have already sold a net three trillion yen (US$18.7 billion) in overseas debt through August 22, the biggest year-to-date outflow since bonds tanked in 2022. “I know it first hand from talking to Japanese investors,” said Michael Weidner, co-head of global fixed income at Lazard Asset Management. “They’ve underinvested in yen securities for probably 25 years. Now it’s become more attractive and they are reallocating.” Toshinobu Chiba, a Tokyo-based fund manager at Simplex Asset Management, is one of those investors, saying he’s gone bearish on U.S. Treasuries and started buying the 10-year Japanese government bond just before its recent peak in yield. “It’s easy to buy the 10-year at above three per cent,” said Chiba. “Most of the lifers have a strong incentive to buy right now. It’s a natural movement for Japanese investors to pull money out of the U.S. and back into Japan.” In Australia, a country in which Japanese investors were once the largest foreign holder of debt in pre-pandemic years, market participants are feeling a shift from buying to holding. “This year (Japanese investors) have been less on accumulation and more holding their exposures reasonably consistent,” said Ryan Ellis, Citi’s head of markets sales for Australia and New Zealand. “They’ve got a home market bias for the first time in a lot of years,” he said, and the Aussie market has been under pressure from central bank rate hikes. “It’s very much a return-driven decision,” he said. Pension shifts Global debt markets shuddered in July when Japan floated the possibility of a pivot by its Government Pension Investment Fund to domestic assets. While there are no signs the US$1.8 trillion behemoth is adjusting its portfolio, other Japanese institutional funds are reassessing opportunities at home. A survey of 82 corporate Japanese pension funds by J.P. Morgan Asset Management released on Wednesday showed the net share planning to boost domestic bond holdings was the highest since the poll began in 2008. The funds continued to reduce their holdings of overseas debt amid high currency hedging costs, the survey showed. Such shifts matter because Japanese investors are major players in markets from U.S. Treasuries to French and Australian debt. “As JGB yields rise, the relative attractiveness of domestic bonds improves on a currency-hedged basis, potentially encouraging a shift from overseas assets back into Japanese fixed income,” Masayuki Nakajima, senior strategist at Mizuho Bank in London, said in a note. The 10-year JGB yield hit three per cent on Tuesday for the first time since 1996, having more than tripled over the past two years. Over the same period 10-year U.S. Treasury yields have climbed about a percentage point and the gap between the two has narrowed by more than 100 basis points. “As you see Japanese bond yields rise ... all of a sudden, the marginal buyer for Treasuries and international bonds is reducing,” said Justin Onuekwusi, chief investment officer at St. James’s Place in London. “Because ultimately the relative value now between Japanese bonds and international bonds is less, and that bit really is actually quite important.” Hawkish BOJ Less clear cut are the foreign exchange implications, given overseas positions are often hedged. The fact yields have yet to stabilize in Japan is also holding off some buying. Turning the fortunes of Japan’s sliding yen will require the central bank, which meets later this month to hike “more rapidly than what markets expect,” said Kevin Thozet, member of the investment committee of Paris-based asset manager Carmignac. JGB yields have also been driven up in part by Prime Minister Sanae Takaichi’s push for big fiscal spending. Finance Minister Satsuki Katayama on Wednesday again declined to comment on the three per cent threshold, beyond reiterating a commitment to appropriate debt management and saying government budget requests were at reasonable levels. Overseas positions by major Japanese investors that took decades to accumulate also won’t turn on a dime. But in a world where all the major borrowers are overextended and currency risks are rising, home more than ever in recent memory is looking like a better option than chasing yields overseas. “The story is not large-scale repatriation, but Japan gradually ceasing to be the marginal buyer of foreign bonds,” said Masahiko Loo, senior fixed income strategist at State Street Investment Management in Tokyo. “Less incremental demand from one of the world’s largest pools of savings is helping push term premium higher globally.” Reporting by Rocky Swift and Junko Fujita in Tokyo; Tom Westbrook and Ankur Banerjee in Singapore; Stefano Rebaudo in Milan; Dhara Ranasinghe, Harry Robertson in London; Gaurav Dogra in Bengaluru and Alun John in London; Editing by Sam Holmes
