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

Japan's bond market has experienced a significant shift, with benchmark yields breaking a three-decade-old barrier. This development is reversing the steady flow of capital into global bond markets and making Japan the biggest owner of US Treasuries. The 3% threshold is significant not only for funding costs in Japan but also for the shifting investment flow that has made the country a reliable buyer of sovereign debt worldwide.

The global bond rout deepened on September 2, with traders attributing part of the move to Japanese investors' potential retreat from overseas holdings. While there is no indication of Japan selling its US$2.4 trillion overseas debt hoard just yet, global fund managers and data show a steadier drawdown is underway. Japanese investors have already sold a net 3 trillion yen in overseas debt through August 22, the largest year-to-date outflow since bonds tanked in 2022.

Michael Weidner, co-head of global fixed income at Lazard Asset Management, notes that Japanese investors have been under-investing in yen securities for over 25 years. Now, with higher returns becoming more attractive, they are reallocating their investments. Toshinobu Chiba, a fund manager at Simplex Asset Management, has gone bearish on US Treasuries and started buying Japanese government bonds (JGB) due to their attractive yields.

In Australia, Japanese investors who once held the largest foreign debt positions are now feeling a shift towards holding their exposures. This change is driven by a home market bias and the impact of central bank rate hikes on the Australian market. Many Japanese pension funds are also reassessing their overseas debt holdings, with a survey revealing that the share planning to boost domestic bond holdings is the highest since 2008.