Japan's Gradual "Capital Reflow": Japanese Bond Purchases Heat Up, No Major Retreat from Overseas Assets

According to Jinse Finance APP, several leading Japanese asset management companies are expected to announce plans to increase holdings of domestic bonds, with the market closely watching whether they will accelerate the reduction of overseas assets to promote a return of funds to the domestic market. Analysts say that while a large-scale asset reallocation is not expected, a sustained return of capital could provide support for the yen; currently, changes in Japanese demand are under close observation, as they could drive overseas markets.

In recent months, as the Kōichi Takafumi government has worked to support the yen, which fell to a 40-year low in July, the prospect of Japan reallocating some overseas funds back home continues to attract market attention.

According to Japan Life Insurance Association data, Japanese life insurers manage about $2.5 trillion in assets, with about a quarter held in overseas assets. As yields have surged, several companies have recently indicated they are focusing on domestic bonds.

Keita Matsumoto, Head of Financial Markets at SMBC Nikko Securities, said: “I don't see a current trend of selling foreign bonds and buying Japanese government bonds as a return of funds.”

“(Life insurers) are cautiously increasing exposures to Japanese government bonds... Their strategy remains to buy on dips as yields rise.”

According to Japan's Ministry of Finance, net sales of foreign bonds by Japanese investors this year exceeded 5 trillion yen (about $32 billion), of which about 289 billion yen came from life insurance companies.

In Japan, while 10-year Japanese government bond yields remained under central bank control just over two years ago, they have now doubled, surpassing 3% for the first time in 30 years.

Shoki Omori, Chief Fixed Income Strategist for Deutsche Bank Japan, said that as 30-year Japanese government bond yields consolidate around 4%, domestic insurers may increase buying; whereas a rise in hedge ratios could be a precursor to the sale of foreign bonds.

Omori said: “With the Bank of Japan still raising rates, they will remain cautious. Some institutions will let their hedged foreign bonds gradually roll off at maturity. I do not expect broad-selling of foreign bonds and switching back into yen.”

He added: “Higher yields have attracted buyers back to the Japanese government bond market, but have not brought the funds back home.”

It's still too early to act

Nippon Life, Meiji Yasuda Life, and Dai-ichi Life collectively manage nearly 220 trillion yen in assets and are expected to announce investment plans next week.

This year, inflation, rising sovereign debt, and growth expectations fueled by the AI boom have driven yields sharply higher in developed economies. In Japan, Kōichi Takafumi’s spending plans and tax cut pledges have also heightened market concerns.

A year ago, large Japanese life insurers said they expected to cut holdings of yen-denominated bonds, and the subsequent rise in the entire yield curve suggests the market has not yet found a bottom.

Tetsuji Hayashi, Product Specialist at the Investment Department of Sumitomo Mitsui DS Asset Management, said that Japanese institutions that sharply reduced government bond holdings during the era of negative interest rates are gradually re-evaluating the domestic market.

Hayashi said: “We are starting to see a shift in capital back into yen bonds. As rates rise, the 10-year Japanese government bond yield has exceeded the FX-hedged 10-year US Treasury yield.”

Last month, the Bank of Japan raised its key interest rate to a 31-year high, and many analysts expect the central bank to hike again by the end of this year as price pressures spread and concerns about yen weakness persist.

An asset management official at a major life insurance company said that as the Bank of Japan reduces its bond holdings and tightens policy, while Japan's fiscal situation remains uncertain, supply and demand dynamics for Japanese government bonds across maturities remain worrying.

The official said that Japanese bond yields have now reached “quite attractive levels,” but have not yet peaked.

The official stated: “It is still too early to act. The Bank of Japan has not finished raising rates, and fiscal concerns have not disappeared.”