Japanese government bond yields near three-decade highs are giving fresh prominence to a long-discussed risk for global investors: the prospect of the nation’s vast pool of overseas capital returning home.
While there’s little sign of a rush yet, some money managers say markets are underpricing how quickly that could change as JGBs become increasingly attractive — and how even a modest shift could ripple through the yen and global bond markets.
“If domestic yields continue to rise, Japan may gradually retain more capital at home,” said Ales Koutny, head of international rates at Vanguard Asset Management Ltd.’s active funds. “That matters not only for the yen and JGBs, but also for Treasury markets, European bond markets and broader global funding conditions.”
For decades, rock-bottom interest rates encouraged Japanese investors to scour overseas markets for returns, turning the country into one of the world’s biggest exporters of capital. Japan is the largest foreign holder of US Treasuries with a $1.1 trillion stockpile, while Japanese investors hold almost $5 trillion of overseas assets.
Now that calculus is shifting. Japan’s 10-year yield touched 3% last week for the first time since 1996, driven by concerns over inflation and fiscal spending as well as expectations the Bank of Japan may need to raise rates more quickly. The milestone coincided with a 4% rally in the yen this month and growing speculation that the Government Pension Investment Fund could eventually increase its allocation to domestic bonds.