30-year JGB yield hits record 4.27%; yen carry trade unwinding, global asset sell-off feared

Bank of Japan [Reuters]
Bank of Japan [Reuters]

Major Japanese banks and insurers have been selling foreign bonds in recent months while ramping up purchases of domestic government debt, as yields on Japanese government bonds climb to their highest levels in decades — prompting a shift in investment strategy among the country's biggest institutional players.

Markets are watching closely to see whether the trend will trigger a broader repatriation of Japanese capital from overseas. A large-scale movement of funds back to Japan could send significant shockwaves through global bond and currency markets.

The Financial Times reported Wednesday, citing data from the Japan Securities Dealers Association, that major banks and insurers made net purchases of 5.4 trillion yen ($34.1 billion) in Japanese government bonds with maturities of two years or more between April and August this year.

That figure marks the largest five-month net purchase since early 2023.

The Bank of Japan's policy interest rate currently stands at its highest level in 31 years, and market interest rates are also at their highest in decades.

At the same time, Japanese institutions have been aggressively selling foreign bonds.

Data from a Japanese Finance Ministry survey of major investors showed that institutional investors' net selling of overseas bonds reached 2.5 trillion yen in September.

Banks' net selling of foreign bonds in the January-to-September period this year was the largest for that stretch since 2005.

The Financial Times said sharp volatility in overseas bond markets — including those of the United States and France — had accelerated Japanese banks' retreat from foreign fixed income.

"As Japanese government bond yields have risen again, it has become possible for investors in Japan to invest domestically rather than abroad," said Chris Scicluna, head of research at Daiwa Capital Markets Europe. "Everyone is watching to see whether this is the beginning of a long-term repatriation of funds back to Japan."

The shift in behavior among Japanese investors could be a boon for the domestic government bond market, but it poses a significant risk to overseas equity and bond markets.

Experts warn the trend could drive a sharp appreciation of the yen, which in turn could trigger an unwinding of the so-called yen carry trade — in which foreign investors borrow cheaply in yen to buy higher-yielding assets abroad — forcing a mass sell-off of overseas holdings.

"As the market gains conviction that the Bank of Japan will continue normalizing monetary policy by raising interest rates, the belief is solidifying that Japanese government bond yields will remain elevated and stable going forward," said Masahiko Loo, senior bond strategist at State Street Global Advisors.

The yield on Japan's 30-year government bond stood below 2.3 percent at the start of last year but surged to a record high of 4.27 percent earlier this month. The 10-year yield also hit its highest level in 30 years this month.

"Japanese government bonds are emerging as a formidable competitor in the global race to attract capital," Loo said.

Steven Spratt, a rates strategist at Societe Generale, said the data clearly showed Japanese banks pulling back from foreign bond investments, though he noted that a definitive increase in domestic JGB purchases had yet to fully materialize.

Shoki Omori, chief strategist at Deutsche Bank's Tokyo branch, said it was "too early to say" that a repatriation of Japanese funds was underway, adding that Japanese investors' purchases of European government bonds — including German debt — suggested they were broadly seeking "safer assets" rather than simply returning capital home.


mokiya@heraldcorp.com