Selling U.S. bonds, buying Japanese bonds--Wall Street prepares for "Japanese capital inflow"

The Japanese government bond market is experiencing unprecedented volatility in decades, prompting global asset managers to reevaluate a long-overlooked risk: will Japanese investors, holding about $1 trillion in U.S. Treasuries, move their money back home?

According to the latest report from the Financial Times, several investment institutions have begun preparing for a large-scale repatriation of Japanese funds, betting that Japanese investors will gradually sell off U.S. Treasuries and instead buy Japanese government bonds (JGBs), which are experiencing rising yields.

Japanese bond yields soar to multi-decade highs

On Friday, the benchmark 10-year Japanese government bond yield rose intraday to 2.73%, the highest level since May 1997.

The 30-year JGB yield broke 4% for the first time—an unprecedented level since the bond’s initial issuance in 1999. Yields on 5-year and 20-year government bonds also hit record highs earlier this week.

Satsuki Katayama, Japan’s Finance Minister, said on Friday that yields on government bonds in major global markets are rising “and these dynamics are interacting, creating a compounded effect.”

Analysts expect Japanese bond yields to continue climbing. The Bank of Japan raised its policy rate to 0.75% in December last year—the highest in three decades—and the market widely anticipates a further 25 basis point hike to 1% in June.

The trillion-dollar “repatriation” logic

Understanding this betting trend requires first understanding why Japanese investors have held such large overseas assets.

For decades, Japan maintained ultra-low interest rates, with domestic bonds offering little return. To pursue higher yields, Japanese insurance companies, pension funds, and banks have heavily invested abroad, buying U.S. Treasuries, European bonds, and various global assets.

Currently, Japanese investors hold about $1 trillion in U.S. Treasuries, making them the largest foreign holders of U.S. debt, far surpassing other countries.

Now, with Japanese bond yields rising sharply, this logic is reversing. Mark Dowding, Chief Investment Officer at UK asset manager BlueBay, explicitly pointed out this shift. BlueBay launched its first Japanese bond fund just this March.

Dowding said, “New inflows will no longer be allocated abroad. They won’t flow into U.S. corporate bonds or U.S. Treasuries, but will instead be redirected back into Japan.”

Funds have already begun to “trickle” back

Market data shows signs of fund flows reversing, albeit on a small scale.

According to data from fund tracking firm EPFR, in March, investors net flowed approximately $700 million into Japanese sovereign bond funds—the largest monthly inflow on record for this category. In April, net inflows slowed to $86 million, returning to recent normal levels.

Matt Smith, fund manager at Ruffer, expressed a more direct view. “Pressure is building—the long-term domestic yields are rising steadily, and the signals from institutions are clear: ‘Bring the money back to Japan.’ We believe the yen will appreciate slowly at first, then accelerate suddenly.”

Smith also said Ruffer is currently holding a long position in yen as a core hedge. “When market turmoil occurs—especially around the U.S. credit market—Japanese investors will bring capital home, and the yen will strengthen.”

Repatriation has not yet become widespread, and Japanese bonds themselves carry some risks

However, analysts caution that Japanese institutional investors are still net buyers of foreign bonds.

Abbas Keshvani, Macro Strategist at RBC Capital Markets Asia, pointed out that although Japanese bond yields have “on the surface provided better compensation,” over the past 12 months, Japanese investors have still net purchased about $50 billion in foreign bonds.

The reason lies in the inherent uncertainty of the Japanese bond market itself. Prime Minister Fumio Kishida won re-election in February, with campaign promises including increased government spending and measures to combat inflation. Increasingly, analysts warn that the government may be forced to prepare supplementary budgets later this year, which would further depress Japanese bond prices and push yields higher.

Keshvani said, “Supply and demand dynamics all point toward yields continuing to rise. As an investor, if you know yields will keep climbing, it’s hard to want to buy now.”

Previously, the Bank of Japan was the market’s dominant buyer through quantitative easing and yield curve control policies, purchasing large amounts of Japanese bonds. As the BOJ gradually exits these policies, markets are reverting to traditional supply and demand logic, leading to increased volatility in JGB prices.

What does this mean for the U.S. bond market?

The potential scale of Japanese fund repatriation forces the U.S. Treasuries market to take this risk seriously.

Japan is the largest foreign holder of U.S. Treasuries, with holdings around $1 trillion. If Japanese institutional investors begin systematically reducing their holdings, the impact on the supply-demand balance of U.S. debt will be substantial.

Currently, Wall Street’s bets are more about strategic positioning than reacting to actual events. But as Japanese bond yields continue to climb—analysts see a realistic target of 3% for the 10-year JGB later this year—this betting logic will become increasingly clear.

Risk warning and disclaimer

        Markets are risky; investments should be made cautiously. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions herein are suitable for their particular circumstances. Invest at your own risk.