How Japan’s bond rout is turning the tide of global capital

Tokyo's benchmark Japanese bond yields breached a three-decade high, drawing global capital back to the country's debt markets. This shift marks a reversal of the consistent flow of funds into international bond markets that once favored Japan, as the nation became the largest investor in U.S. Treasuries and a reliable buyer of sovereign debt globally.

While Japan has not yet sold its US$2.4 trillion overseas debt holdings, data shows a notable outflow of 3 trillion yen (US$18.7 billion) in debt this year, the largest year-to-date since the financial crisis in 2022. Japanese investors, previously underinvested in yen securities for decades, are reallocating assets, with fund managers noting the appeal of higher returns in domestic bonds.

The shift is not limited to Japan, as pension funds and asset managers in other countries observe a similar trend, with a growing share of Japanese corporate pension funds planning to increase domestic bond holdings. This trend may be driven by factors such as currency hedging costs, high government bond yields, and fiscal spending initiatives by the Japanese government.

As the Bank of Japan's hawkish stance and rising term premium remain uncertain, the gradual shift in investor sentiment highlights the waning attractiveness of foreign bonds for Japanese investors.