Japan's Bond Yields Surge as Pension Fund May Shift to Domestic Assets

Japanese government bond yields have hit multi-decade highs, with the benchmark 10-year yield reaching 2.901% last week, its highest since 1996 Source: cnbc. This surge comes amid Bank of Japan (BOJ) policy normalization and concerns over fiscal spending, but experts are divided on whether Japanese bonds are now attractive.

Bond Market Revival

After years of yield curve control, the BOJ abandoned the program in March 2024 and has raised rates to 1%, a 31-year high Source: scmp. Some analysts, like Charles Gave of Gavekal, argue that Japanese long bonds are "the most attractive bond market in the world today" Source: cnbc. However, others caution: DWS's Henning Potstada notes that European bonds offer higher policy rates (2.25% vs. 1%) and Japan's debt-to-GDP ratio above 200% raises sustainability concerns Source: cnbc.

Pension Fund Shift

Finance Minister Satsuki Katayama announced the government aims to steer the $1.8 trillion Government Pension Investment Fund (GPIF) toward greater domestic investments Source: cna. While this sparked market rallies, sources say there are no plans to overhaul GPIF's target allocation; instead, shifts may occur within existing allowable ranges Source: cna. Foreign managers like State Street and Legal & General, who oversee most of GPIF's $930 billion offshore exposure, could face fee losses if foreign portfolios are trimmed Source: cna.

Yen and Store-of-Value Assets

Despite rising yields, the yen remains weak, trading near 162 per dollar, with hedge funds betting against it at the highest level since 2007 Source: scmp. Some analysts see the government's push for domestic investment as reinforcing "national capitalism," potentially boosting demand for limited-supply assets like bitcoin and gold Source: coindesk. However, a former BOJ official warns that rapid rate hikes above 2% could strengthen the yen Source: coindesk.