Japan’s bond market resumes activity after decades in the wilderness

Japan’s government bond yields have reached their highest level in decades, providing an indicator 10 years Last week it reached a level not seen since 1996.

Japanese government bonds have been sold off on concerns about policy normalization by the Bank of Japan and Prime Minister Sanae Takaichi’s spending plans, but experts say the asset class is worth a second look for investors.

“For global bond investors, government bonds are increasingly moving from ‘uninvestable’ to ‘investable,'” said Masahiko Lu, senior fixed income strategist at State Street Investment Management.

Lu said decades-high yields meant investors could “finally” reap the rewards of owning Japanese paper again.

The 10-year Treasury yield hit 2.901% last Thursday and is currently trading at 2.781%, up more than 70 basis points since the beginning of the year. The 20-year government bond yield also hit a record high of 3.901% last Thursday.

As Japan seeks to revitalize its economy, Japanese government bonds have long been affected by the Bank of Japan’s yield curve control program, which sets the 10-year bond yield target at “near zero.” The country abandoned the YCC in March 2024 as part of its efforts to normalize monetary policy.

Charles Gabe, co-founder of Hong Kong-based research firm Gabekal, said in a research note last week that Japanese government bond yields were higher than they should have been.

“The asset to buy in Japan that no one owns is Japanese bonds, especially Japanese long-term bonds. The Japanese bond market is probably the most attractive bond market in the world today.”

Gabe said if there are no assets in Japan, investors should move to a “balanced” Japanese portfolio of 50% stocks and 50% bonds, and other investors should also replace euros, US bonds and gold with long-term Japanese bonds.

“Soon, Japanese yields will start to fall and the yen will start to appreciate, especially if oil stays at current prices. Therefore, long-term Japanese bonds will significantly outperform gold in yen terms for the foreseeable future,” he added.

However, some analysts have different views on the appeal of Japanese bonds.

Henning Postada, global head of multi-asset at Germany-based asset manager DWS, said other bond markets, such as European bonds, remained attractive due to rising policy rates. Postada pointed out that the European Central Bank’s interest rate is 2.25%, while the Bank of Japan’s is 1%.

Postada added that debt sustainability is more of a concern for Japan, with Tokyo’s debt-to-GDP ratio exceeding 200% compared to 81.7% in the EU. “We believe that if we maintain our European positions or have more positions in Europe because of debt sustainability issues, we will maintain them, and for precisely these investors, Europe provides stability.”

Mattioli Woods investment manager Lauren Hyslop said investors were returning to the market “selectively” as Japanese government bond yields continued to rise.

“With yields above 3.5%, foreign investors are returning to the 20-30 year segment, with a record 9.3 trillion yen flowing into long-term government bonds in 2025 alone,” he said in an email. “The 10-year is around 2.87%, close to what most major housing companies consider fair value and broadly in line with Japan’s growth and inflation outlook.”

However, there is a “live risk” in ultra-long positions.

“If the 30-year interest rate exceeds 4.5%, life insurance companies will be forced to sell, so that level is both an opportunity and a danger zone,” Hyslop said. “GPIF, the world’s largest pension fund, remains the most important potential buyer, and being able to reallocate its $1.8 trillion pool into domestic bonds would be a powerful stabilizing force.”

Hyslop told CNBC that these changes will have a structural impact on global bond markets. “Japan has spent 20 years as a silent supporter of cheap global borrowing. Those days are over,” she said.

Last Friday, Japan’s Finance Minister Satsuki Katayama reportedly said the Japanese government would explore ways to encourage pension funds, including GPIF, to “significantly invest in Japanese financial assets.”

Reuters reports that the government is looking for ways to increase these investments, but has no immediate plans to revise GPIF’s medium-term targets.

“As domestic yields rise, Japanese investors are repatriating funds, selling $29.6 billion in U.S. Treasuries in the first quarter of 2026 alone, removing historically reliable buyers from a market already weathering a large budget deficit.”

John Siddaoui, senior portfolio manager for global fixed income at Federated Hermès, told CNBC in an email that even as Japan’s 10-year bond yields hit multi-decade highs, a “combination of uncertainties” continues to dampen nominal demand.

“So the emerging fiscal pressures and the general view that the Bank of Japan is still behind the curve (in rate hikes),” he said. “This dynamic is further exacerbated by geopolitical tensions in the Middle East, which is putting upward pressure on global yields.”