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Japan's Biggest Investors Are Rediscovering Their Own Bonds
A record-setting auction suggests the country's savings may be coming back, slowly. So far the evidence points to the banks even as its giant pension fund hasn’t shown its hand.
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AI-generated summary, reviewed by the editor.
- A 20-year Japanese bond auction drew orders nearly six times the amount offered, the strongest demand on record for that tenor, against 3.73 times on average over 12 months.
- Domestic investors bought 21.7 trillion yen of coupon-bearing bonds from April through August, but banks led net sales of foreign bonds; analysts see no broad repatriation trend.
- Takuji Okubo says the Government Pension Investment Fund could raise its domestic-bond weight; these are his scenarios, and the fund has announced no change.
It restates the article and adds no new facts. How we use AI
For the longest time, trading in Japanese bonds was akin to watching paint dry.
Fixed-income traders would trade in their mornings playing golf with clients, then sit for five-course lunch meetings stretching over two hours with some more clients, and then saunter into the office to reply to emails and do calls with colleagues in Hong Kong and London.
You couldn’t blame them. There was literally nothing one could do in the world’s second-largest sovereign bond market.
There was seemingly no end in sight to Japan’s so-called lost decades of a prolonged period of economic stagnation and deflation in the aftermath of a collapse in the asset price bubble of its massive real-estate and stock market in the 1990s. At the bubble’s peak, Japanese paper magnate Ryoei Saito paid a then-record $82.5 million for Vincent van Gogh’s Portrait of Dr. Gachet in 1990.
It prompted a unique experiment in monetary policy by the Japanese government. Slash interest rates to zero or below and make your central bank buy bonds issued by the government. This in turn would create artificial demand for the bonds that would push yields and thereby borrowing costs lower, enabling a worldwide glut of easy money that inflated asset prices as far afield as startups in Silicon Valley. Bond prices move inversely to yields.
That’s beginning to change.
When the Japanese government offered to sell 537.1 billion yen or about $3.4 billion of 20-year bonds on Tuesday morning, it received orders nearly six-fold the paper on offer, marking the strongest demand the tenor had drawn on record. Demand averaged 3.73 times in the 12 months prior, according to Bloomberg. That helped yield fall as much as six basis points to 3.710 percent.
Bid-to-cover ratio: bids received divided by amount accepted
The sale came at a tense moment. Earlier this month, Japan's super-long yields were at levels not seen in decades, with the yield on the 30-year bond touching a record. This prompted chatter on bond buying desks about whether Japanese money that has financed Western governments for a generation is beginning to come home.
ReadJapan is Bringing Its Savings Home
Winds of Change
The change that is underway in Tokyo has repercussions from France to the United States.
Japan held about $1.07 trillion in Treasuries in August, more than any other foreign country. If its banks, insurers and pension funds decide they would rather own Japanese debt, American and European borrowers would lose some of their steadiest buyers.
Domestic investors bought 21.7 trillion yen of coupon-bearing Japanese government bonds from April through August, according to the Japan Securities Dealers Association, which is nearly 90 percent of what they bought in all of the last fiscal year. Purchases of medium-term bonds, the part of the market getting the most attention, reached 12.7 trillion yen, against 9.1 trillion for the whole of the previous year. Super-long buying, at 3.6 trillion yen, roughly matched last year's total, still far below the 19 trillion yen of fiscal 2021.
Net purchases of coupon-bearing JGBs by domestic investors, trillion yen
"For the first time in years, Japanese bonds are now beating inflation," former market analyst and Forbes columnist Dan Runkevicius wrote on his verified LinkedIn profile. The 10-year yield, which was near 0.1 percent at the start of 2022, reached 3.075 percent on Sept. 24, its highest since August 1996. According to calculations by Runkevicius, after the cost of hedging against currency swings, a Japanese 10-year bond now pays roughly 0.8 percentage points more than an equivalent Treasury. "We are starting to see a shift back toward yen bonds," Tetsuji Hayashi, a product specialist at Sumitomo Mitsui DS Asset Management told Reuters.
Rock You Like a Hurricane
Who is actually selling foreign bonds is a different question, and the answer is not the one most people expect.
Japanese investors sold a net 969 billion yen of foreign bonds in September, the second straight month of net selling, according to Japan’s Ministry of Finance. The total for the year is about 5.08 trillion yen, the most since 2022. Banks did the selling, unloading a net 2.49 trillion yen of foreign long-term bonds in September alone. Japanese life insurers sold a net ¥288.6 billion of foreign long-term debt securities in September 2026. Cumulatively, their net sales reached approximately ¥1.76 trillion in January–September, or ¥540.1 billion during the first half of FY2026, according to Ministry of Finance investor-type data released on October 8. Trust accounts, which hold money for pension funds and other clients, bought 1.2 trillion yen.
Net purchases (+) and sales (−) of foreign long-term bonds, September 2026, trillion yen
"I don't believe there is a trend toward repatriation in terms of divesting from foreign bonds to buy JGBs right now," Keita Matsumoto, head of financial markets at SMBC Nikko Securities, told Reuters this month. Shoki Omori, Deutsche Bank's chief fixed-income strategist for Japan, said: "What I do not expect is a broad move to sell foreign bonds and bring the money back into yen." The insurers, in his words, "have not brought the money home."
That may be changing at the edges.
Fukoku Mutual Life Insurance told Bloomberg it sees room to shift from foreign bonds into yen bonds because yields have risen more than it expected. Three larger insurers, Nippon Life, Meiji Yasuda Life and Daiichi Life, together manage nearly 220 trillion yen and were expected to unveil investment plans as soon as this week, Reuters reported.
One piece of Tuesday's result complicates the story.
Bloomberg noted that a large share of the buying was unidentified, which it said suggests foreign investors stepped up too. The auction data do not say who the bidders were.
"It is still just one piece of evidence," Takuji Okubo, managing director of Japan Macro Advisors, said on his verified LinkedIn profile. The 30-year auction on Oct. 8 was firm, with a bid-to-cover ratio of 3.88 against 3.79 at the previous sale and a 12-month average of 3.56, according to Bloomberg, but nothing extraordinary, Okubo said.
Okubo nonetheless thinks the 20-year sale may be a turning point.
His reasoning starts with a model he laid out in a July 20 Substack post, which attributes most of the rise in Japanese yields since 2022 to two things: higher inflation expectations, and the return of a term premium, the extra pay investors demand for holding long bonds, after the Bank of Japan stopped suppressing it.
He argues both forces are largely spent.
Long-term investors, he wrote, had seen super-long bonds as cheap but hesitated for fear of "a value investment becoming even deeper value." Japan's bond market stayed relatively calm compared with overseas markets during the turbulence of the past two and a half months, which he dates to a July 29 press conference by Federal Reserve Chair Kevin Warsh.
"I guess they were in the process of gathering confidence," Okubo said. The auction may show "their confidence reached a tipping point."
No One Like You
Okubo’s boldest claim concerns the Government Pension Investment Fund, which he calls the whale. It managed 317.8 trillion yen or about $2 trillion in June, making it among the largest pools of retirement money in the world.
In the 2012 fiscal year, domestic bonds were 62 percent of its portfolio, according to Okubo. The fund cut that target to 35 percent in 2014 and to 25 percent in 2020, when Japanese yields were close to zero or below. Today it splits its money evenly among four assets: domestic bonds, foreign bonds, domestic stocks and foreign stocks.
Okubo built a simplified version of the fund's own allocation formula and found that, with Japanese bonds now yielding what they do, the optimal domestic-bond weight could be about 50 percent. Getting to 35 percent would take roughly 32 trillion yen of additional purchases, by his account. Getting to 50 percent would take roughly 80 trillion yen.
Domestic-bond share of the Government Pension Investment Fund portfolio, percent
To be sure, these are his scenarios, not the fund's plans. The fund itself has announced no change.
That silence on the part of the GPIF would favor discretion, though.
The fund may let its domestic-bond weight drift six percentage points either side of its target without announcing anything, so a move to 31 percent is possible today without a public decision. In 2014 it shifted within that band first and told the public afterward. Okubo notes that minutes of the fund's October 2013 committee meeting record Kazuo Ueda, then the committee's chair and now governor of the Bank of Japan, saying: "I think there is a fair chance that bonds will crash at some point in the next five to ten years."
The fund reports its holdings quarterly, and the quarter that ended in September has not yet been disclosed; Okubo expects the figures in early November.
Writing this week he suggested that the Oct. 20 auction may have given the fund a chance to trade without having to show its hand right away. Nothing in the auction data confirms that. It is a hypothesis from someone who has predicted a move since early September.
Send Me an Angel
If the fund does shift, the money would most likely come out of foreign bonds, since it still needs stocks for growth.
Okubo points out that more than half of its foreign bonds are in dollars, which makes the question awkward in Washington as well as Tokyo. Three smaller public pension funds run the same four-part allocation and hold another 87 trillion yen between them, a figure that includes legacy reserves, he writes, so any shift could have a cascading effect.
Not everyone sees Japanese selling as the main danger even where it is most feared.
The recent selloff in French government bonds shows the flow can run both ways, said Masayuki Nakajima, a senior strategist at Mizuho Bank's European Treasury Department in London. Japanese investors had already cut French holdings sharply, he wrote, and Ministry of Finance data showed modest net purchases in June and July. The recent selloff, he said, pushed the currency-hedged French 10-year yield above its Japanese equivalent, which creates "selective value opportunities."
The Zoo
Stocks are a harder transmission channel to read.
Households bought 11.9 trillion yen of foreign equities through investment funds in the 12 months through August, while pension trust accounts sold 11.5 trillion yen, a near wash, according to estimates by Japan Macro Advisors’ Okubo.
The scarier scenario would be a replay of what happened to global markets in August 2024, when a rapid rise in the yen forced traders to unwind borrowing in yen to buy other assets. Japan's Topix index fell 12 percent in a single session and the VIX volatility index briefly topped 60.
A calibrated reallocation by pension funds would look nothing like that. Though a sudden rally in the yen could. It doesn’t help that hedge funds and leveraged traders or so-called “hot money” are among the largest speculative participants in the Japanese yen futures and options market, frequently driving massive net-long or net-short positions, according to Commodity Futures Trading Commission (CFTC) data.
That is one reason the Bank of Japan's pace matters.
Okubo expects the central bank to hold in 2026 and raise rates in March and December of next year, arguing that credit growth at major and regional banks has eased, to 5.7 percent in September from 6.1 percent in the April-to-June quarter, and that inflation is mostly a supply shock. Overnight index swaps price only about a 6.2 percent chance of a hike at next week's meeting, according to Bloomberg.
A slow Bank of Japan, he argues, reduces the risk that investors who buy long bonds now get hit by another jump in rates.
When the Smoke Is Going Down
This comes as global investors are betting that the reflation and Abenomics leaning government led by Sanae Takaichi would be averse to higher yields.
Her recent nominees to the Bank of Japan (BOJ) policy board, Toichiro Asada and Ayano Sato, dissented against the September hike, although Sato has since signaled support for gradual increases, according to Reuters. They are still outweighed on the board by professionals, led by governor Kazuo Ueda who has hinted at reining in inflation rather than being guided by politics.
In its September 18 vote to guide the uncollateralized overnight call rate to around 1.25 percent, up from around 1.0 percent, Governor Kazuo Ueda, Deputy Governors Ryozo Himino and Shinichi Uchida, and board members Hajime Takata, Naoki Tamura, Junko Koeda and Kazuyuki Masu voted in favor.
Asada dissented. Core consumer price index (CPI) inflation, which excludes fresh food, had recently run below 2 percent, and he judged that economic strength was not assured, so he preferred to keep the old guideline. Sato also dissented. In her judgment, economic and price developments had not accelerated enough to justify a hike at this meeting.
Takata and Tamura objected though only to the wording of the outlook report. Each judged that inflation, underlying inflation included, was already broadly consistent with the 2 percent target.
ReadJapan's Savings Start to Stay Home
Nakajima notes that the average remaining maturity of Japanese government debt is roughly 9.5 years, so refinancing at higher coupons arrives slowly. Higher yields could become a fiscal problem for Prime Minister Sanae Takaichi, who wants to cut the sales tax on food and soft drinks, "but that's more of a problem for tomorrow," according to Runkevicius.
Okubo has been calling for the long end to stabilize since mid-July. He wrote that Tuesday's auction was "a welcome validation, albeit still an early one."
U.S. officials have kept up the pressure on the Bank of Japan to raise rates. Erin Browne, the Treasury's under secretary for international affairs, urged the central bank in Bangkok last week to keep tightening to prevent a disorderly yen decline, Reuters reported. Treasury Secretary Scott Bessent, who skipped the Bangkok meetings, pressed Ueda to raise rates when the two met at the Group of 20 finance gathering in August, according to NHK, which cited a senior Treasury official. Federal Reserve Chair Kevin Warsh told the Bangkok meetings that inflation is a common challenge for policymakers.
This could come as a welcome reprieve for Takaichi ally and U.S. President Donald Trump ahead of the crucial midterms.
Inflation in the U.S. has been above 2% for 66 consecutive monthly readings, according to Bespoke Investment Group (the count has not been independently verified). Cleveland Fed President Beth Hammack said in a PBS interview that she is concerned about an "inflationary mindset" taking hold among consumers and businesses.
The next tests are the 10-year auction on Nov. 5 and the 30-year auction on Nov. 10. The pension fund's September figures are due in early November.
Sources and notes
- Japan Ministry of Finance, Auction Results of 20-Year (Oct. 20, 2026) and 30-Year (Oct. 8, 2026) JGBs · mof.go.jp
- Bloomberg, Tokyo’s 20-year bond sale attracts record demand, Oct. 21, 2026
- Reuters, Japan foreign bond exit continued into September, Oct. 9, 2026
- Reuters, Japanese insurers are poised to bring money back home, gradually, Oct. 15, 2026 · investing.com
- Reuters, Global inflation debate puts BOJ rate-hike pace in spotlight, Oct. 16, 2026 · finance.yahoo.com
- Japan Securities Dealers Association data, as reported by Reuters
- Japan Ministry of Finance, international portfolio investment flows by investor type, released Oct. 8, 2026 · mof.go.jp
- Takuji Okubo, Japan Macro Advisors: The Long Climb in JGB Yields Is Nearly Over (July 20); Yen Repatriation Starts with the Whale (Sept. 10); The BoJ Has Reasons Not to Hike Too Soon (Oct. 14); LinkedIn commentary, October 2026 · takujiokubo.substack.com
- Dan Runkevicius and Masayuki Nakajima (Mizuho Bank), LinkedIn commentary, October 2026
- Government Pension Investment Fund, Investment results for 1Q of fiscal 2026 · gpif.go.jp Total assets 317.8 trillion yen and domestic-bond share 24.60% at end-June 2026.
- U.S. Treasury TIC major foreign holders table Japan 1,068.3 billion dollars in August, 1,103.9 billion in July; United Kingdom 1,009.5 billion. Market values; custodial data.
- Bank of Japan, Statement on Monetary Policy and Summary of Opinions, Sept. 18, 2026, via Securities.io · boj.or.jp
- Japan core CPI (excluding fresh food), August 2026: 1.7% year on year, via Trading Economics · tradingeconomics.com
- Nippon.com, Reuters and NHK reporting on U.S. pressure on the BOJ; Bessent absence from Bangkok meetings, Oct. 10, 2026
- Bespoke Investment Group inflation count, via ROIC.ai, Oct. 14, 2026; Beth Hammack PBS interview, via Stocktwits, Oct. 4, 2026
- Bank for International Settlements, The market turbulence and carry trade unwind of August 2024 · bis.org
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