10 months ago • 2 mins
Japanese investors pulled a record $181 billion out of foreign bonds (two-thirds of them US Treasuries) last year, and poured $231 billion into local government bonds. You can see why in the chart above: it shows the yield on 10-year Japanese government bonds (pink line) and the currency-hedged yield on 10-year US Treasuries (black line). Put differently, the pink line shows what Japanese investors can earn at home and the black line shows what they can earn in the US without worrying about fluctuations in the dollar-yen exchange rate. And since mid-2022, Japanese investors have been able to earn more at home, which prompted them to move a ton of cash out of US Treasuries and into local equivalents.
And these flows could be just the start. That’s because the relative attractiveness of Japanese government bonds increased even more in December after the Bank of Japan (BoJ) allowed 10-year yields to go as high as 0.5%, instead of the previous 0.25%. And, now, with speculation rife that the newly appointed BoJ governor will allow yields to go even higher, the steady selling of overseas bonds in favor of local alternatives by Japanese savers, insurers, and pension funds may be just hitting its stride.
That could be a problem, as there are still more than $2 trillion of overseas bonds left to potentially sell. Japanese investors own more than $1 trillion of US Treasuries and significant amounts of bonds from the Netherlands, France, Australia, and the UK. And any moves to offload more of their holdings would come at a time when the global bond market is already under pressure. Bond yields, which move inversely to prices, have started to climb once again as expectations for peak US interest rates grind higher on the back of a red-hot labor market and fears that inflation will prove tougher to vanquish.
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