Key Takeaways
Global funds are retreating from Japan's super-long bonds just as the Bank of Japan prepares to raise rates to the highest in three decades, creating a divergence between foreign selling and nascent domestic buying that tests who will absorb the government's debt supply.
Foreign investors sold more super-long Japanese government bonds than they bought in April for the first time since 2024, even as the Bank of Japan prepares to raise its policy rate to 1% this week — the highest since 1995, according to data from the Japan Securities Dealers Association.
"The structural demand dynamics for long-end JGBs remain complex despite higher yields," said Carol Lye, portfolio manager and senior research analyst at Brandywine Global Investment Management. The firm recently reduced its JGB exposure, selling 30-year holdings and shifting funds into UK gilts. "Japan is in a deeply negative real interest rate environment, and the BOJ has already fallen somewhat behind in its policy response."
T. Rowe Price Group Inc. and Schroders Plc have also trimmed ultra-long positions or limited themselves to tactical holdings. T. Rowe's Vincent Chung bought JGBs in January after a year of underweight positioning but reduced exposure a month later as fiscal concerns intensified, citing headwinds from expanding fiscal spending, shifting demand structure at the long end, and the BOJ's continued balance sheet reduction.
For dollar-based investors, the arithmetic remains compelling on paper. Hedged 30-year JGBs offer an implied yield above 6% — roughly 170 basis points more than comparable US Treasuries. Yet that premium has failed to offset concerns about policy direction and volatility.
Rate Path and Fiscal Tensions Weigh on Confidence
The BOJ is widely expected to deliver a quarter-point hike this week, bringing the policy rate to 1% for the first time since 1995. Market participants will scrutinize Governor Kazuo Ueda's press conference for signals on the pace of further normalization. Iyogin Holdings Chief Executive Officer Kenji Miyoshi projects the policy rate will reach about 1.5% by the end of 2027 and said the BOJ could accelerate tightening with 50-basis-point moves rather than the standard 25.
Fiscal policy has compounded market unease. Prime Minister Sanae Takaichi's expansionary agenda — including supplementary budgets and repeated calls for cost-of-living relief measures — has fueled concern that fiscal and monetary policy are working at cross-purposes. "If the market perceives the Takaichi administration is pressuring the BOJ, concerns about policy lag could resurface," said Shinichiro Arie, a strategist at a Tokyo-based asset manager. He said a shift from his underweight JGB stance would require the government to stop interfering with monetary policy.
Domestic Buyers Test the Waters
Not all investors are fleeing. Iyogin Holdings, a regional bank based in Ehime prefecture, began buying super-long JGBs in April for the first time since 2016, according to CEO Miyoshi. The bank, which posted a 40% increase in net profit last fiscal year and whose stock has gained 21% year to date, sees the return of positive yields as an opportunity to diversify its 1.7 trillion yen securities portfolio.
"With the return of a positive interest rate world, investment opportunities have arrived," Miyoshi said. The bank currently allocates about 400 billion yen to yen-denominated bonds, 500 billion yen to hedged foreign bonds, and 320 billion yen to unhedged foreign bonds within its portfolio.
RBC BlueBay Asset Management has also found value at the long end. Chief Investment Officer for Fixed Income Mark Dowding said 30-year JGB yields breaking above 4% have made the asset attractive enough to adopt a long-duration bias. "If the BOJ takes the right actions — hiking this month and communicating a continued normalization path within the year — the long end can sustain a recovery from oversold levels," he said.
The question of who will absorb government bond supply as the BOJ reduces its purchases remains the central tension in Japan's roughly 7 trillion dollar debt market. Life insurers and pension funds have yet to show meaningful signs of repatriating overseas assets despite higher domestic yields. Schroders' James Ringer said the firm is focusing on curve trades rather than outright JGB exposure and would need a clear signal of the BOJ's willingness to continue tightening before turning more constructive.
This article is for informational purposes only and does not constitute investment advice.
