JGBs are still mainly a domestic market. What I am trying to say is since the 1990s, there has been little investment opportunity in Japan, so money has gone into JGBs and overseas FDI. But with changing politics, reshoring is now looking like its happening. You also have surging rice prices, and a Japan that imported lots of food from China - suddenly land prices are rising. I would expect (and see) money to not flow to deposits and JGBS anymore - but into real assets.
As for Treasuries - they need to offer a much higher yield to attract Japanese investors now (and probably Europeans as well).
Japan’s demographic challenge low birth rates, shrinking workforce, and rising dependency ratio means that domestic demand for JGBs may remain structurally strong, since the household savings pool via pensions, insurance, banks has to find safe domestic assets. Even if yields rise, it doesn’t necessarily translate into runaway capital flows, because much of the demand is captive
At the same time, if U.S. yields compress due to Fed cuts while Japan normalizes policy, we could indeed see some rebalancing of global portfolios. The magnitude depends on how much Japanese investors still want dollar assets as yield buffers versus yen assets as currency hedges
The rise in 30-year JGB yields to a 30-year high is largely due to the Bank of Japan's recent tapering of the YCC, market concerns about long-term supply pressures, and the wait-and-see attitude of institutions such as life insurance and pension funds as interest rates rise, resulting in a lack of marginal buying in the long term. This, however, does not represent a disappearance of overall demand, but rather a mismatch in maturity and timing. In other words, while short-term interest rate normalization is driving up long-term yields, an aging population and a large savings pool will still lock in a significant portion of demand in the long term
I wouldn’t jump in just yet the yield levels are attractive historically, but supply dynamics and BOJ’s stance still create uncertainty. For structural buyers like pensions, these levels are compelling, but for a tactical investor timing matters a lot
I guess my point is that there have always been strong demand for JGBS for the reasons you cite. I bought 30yr JGBs in 2015, and made a fortune. But I look at them now - and think something has changed... for me, I think Japanese investment cycle has turned, and inflation is coming back. JGBs still look a structural sell to me
Great article and always good to hear some non-consensus view outside of the Japan is dead cause demographics as if that same problem doesn't apply to most of East Asia.
I feel they should not be competiting in areas where China will eventually grind it to dust. They are there for autos which is a big problem and semiconductors, China will get there in 5yrs as a matter of necessity. The race is on between US and China to see who achieves rare earth or semiconductor/AI chips independence first before the next phase of economic decoupling (massively simplifying i know).
Japan should be competing in the cutting edge of lithography, complex missile defense systems, drones and pharmaceutical research. It's strengths are It's infrastructure, intellectual property protection + comfort from the West and also a location that will attract top talent (whether the Japanese wants them is another question).
Fighting China, Korea and Taiwan in areas where profit will get grinded down to zero with no energy strategy is going to be hard.
LDP needs to sort itself out soon. The Japanese are a formidable bunch with clear direction, but now it's rudderless focusing on the trivial debate of a 25bps or 50bps hike a year.
If I look at Japanese policy, its returning to the strategies that drove success in the 1960s and 70s - bigger cooperation between government and corporates, and increasing self sufficiency. Policies to enhance shareholder returns also look good to me. Let see
Rus, is not the wild bullishness late? Two years ago I went long MFG as you did other larger japanese banks. I see today you own MFG too. She is up 200%..2s to 6s. You think $10s?
Your thesis points toward domestic capital repatriation, rising wages, and a potential industrial revival in Japan—all of which would typically support a stronger yen. Do you see this leading to a sustained appreciation in the currency?
I'm still leaning toward a weaker yen policy remaining in place. After all, the weaker yen has finally delivered some inflation and nominal growth, which policymakers have been chasing for decades. Wouldn’t a stronger yen risk undoing that momentum and bring Japan back toward stagnation—something politicians may be reluctant to chance?
Its a good question! If we got a strong Yen, and a strong equity market then it would be a fabulous bull market - and would prove the idea of changing politics driving investment flows into Japan.
What I have seen so far is that JGBs have weakened and Yen has weakened - which is the reverse of what we saw in the 2000s. I think this is because the Japanese government always wanted to pursue a strategy like this, but was hemmed in by US policy. Now that US policy is supportive, they can make this trade work.
My gut feeling though, is that long Yen is the new widowmaker trade - in that it does not strengthen - and instead we get inflation in Japan instead. That is what JGBs are telling you.
If we postulate that the BoJ wants to inflate the debt away (don't all Central Banks?), and that Japan has lost competitiveness to China in the critical auto sector (just have a look at CN vs KR, JP auto exports), then it's clear the JPY has to remain weak and yields lower than other G7 counterparts.
Isn't this VERY bullish for the TOPIX (exporters), except that unlike in say, Turkiye (where domestic rates are astronomical) you also get a yield pick-up from hedging Yen into Dollars or Euros?
Doesn't that imply being super bullish on yen hedged equities?
Japan looks pretty competitive to me - cheap wages, cheap currency, and government is moving to "Japan First". Currency I am not sure about, but equities look good to me
Russell, how does Japan's demographic situation (low birth rates) factor into this analysis?
I also wonder if higher yields on JGBs and a Fed that allegedly might start cutting will cause capital flight from Treasuries -> JGBs.
Also inflation is global now - so I think flow is from bonds to real assets - not treasuries to JGBS...
JGBs are still mainly a domestic market. What I am trying to say is since the 1990s, there has been little investment opportunity in Japan, so money has gone into JGBs and overseas FDI. But with changing politics, reshoring is now looking like its happening. You also have surging rice prices, and a Japan that imported lots of food from China - suddenly land prices are rising. I would expect (and see) money to not flow to deposits and JGBS anymore - but into real assets.
As for Treasuries - they need to offer a much higher yield to attract Japanese investors now (and probably Europeans as well).
Japan’s demographic challenge low birth rates, shrinking workforce, and rising dependency ratio means that domestic demand for JGBs may remain structurally strong, since the household savings pool via pensions, insurance, banks has to find safe domestic assets. Even if yields rise, it doesn’t necessarily translate into runaway capital flows, because much of the demand is captive
At the same time, if U.S. yields compress due to Fed cuts while Japan normalizes policy, we could indeed see some rebalancing of global portfolios. The magnitude depends on how much Japanese investors still want dollar assets as yield buffers versus yen assets as currency hedges
If this is true why are 30 year JGBs at the highest level in 30 years?
The rise in 30-year JGB yields to a 30-year high is largely due to the Bank of Japan's recent tapering of the YCC, market concerns about long-term supply pressures, and the wait-and-see attitude of institutions such as life insurance and pension funds as interest rates rise, resulting in a lack of marginal buying in the long term. This, however, does not represent a disappearance of overall demand, but rather a mismatch in maturity and timing. In other words, while short-term interest rate normalization is driving up long-term yields, an aging population and a large savings pool will still lock in a significant portion of demand in the long term
So are you buying 30 year JGBs?
I wouldn’t jump in just yet the yield levels are attractive historically, but supply dynamics and BOJ’s stance still create uncertainty. For structural buyers like pensions, these levels are compelling, but for a tactical investor timing matters a lot
I guess my point is that there have always been strong demand for JGBS for the reasons you cite. I bought 30yr JGBs in 2015, and made a fortune. But I look at them now - and think something has changed... for me, I think Japanese investment cycle has turned, and inflation is coming back. JGBs still look a structural sell to me
Great article and always good to hear some non-consensus view outside of the Japan is dead cause demographics as if that same problem doesn't apply to most of East Asia.
I feel they should not be competiting in areas where China will eventually grind it to dust. They are there for autos which is a big problem and semiconductors, China will get there in 5yrs as a matter of necessity. The race is on between US and China to see who achieves rare earth or semiconductor/AI chips independence first before the next phase of economic decoupling (massively simplifying i know).
Japan should be competing in the cutting edge of lithography, complex missile defense systems, drones and pharmaceutical research. It's strengths are It's infrastructure, intellectual property protection + comfort from the West and also a location that will attract top talent (whether the Japanese wants them is another question).
Fighting China, Korea and Taiwan in areas where profit will get grinded down to zero with no energy strategy is going to be hard.
LDP needs to sort itself out soon. The Japanese are a formidable bunch with clear direction, but now it's rudderless focusing on the trivial debate of a 25bps or 50bps hike a year.
If I look at Japanese policy, its returning to the strategies that drove success in the 1960s and 70s - bigger cooperation between government and corporates, and increasing self sufficiency. Policies to enhance shareholder returns also look good to me. Let see
I see inflation everywhere in Japan. Markets continue to price a BoJ behind the curve with both JGBs and currency continued weakness.
Yes - and with surging rice prices I cannot see how wages do not rise in a meaningful way.
https://www3.nhk.or.jp/news/html/20250831/k10014908571000.html
As I an long Japanese banks, rising rents is a positive for me....
Rus, is not the wild bullishness late? Two years ago I went long MFG as you did other larger japanese banks. I see today you own MFG too. She is up 200%..2s to 6s. You think $10s?
Hi Russell,
Your thesis points toward domestic capital repatriation, rising wages, and a potential industrial revival in Japan—all of which would typically support a stronger yen. Do you see this leading to a sustained appreciation in the currency?
I'm still leaning toward a weaker yen policy remaining in place. After all, the weaker yen has finally delivered some inflation and nominal growth, which policymakers have been chasing for decades. Wouldn’t a stronger yen risk undoing that momentum and bring Japan back toward stagnation—something politicians may be reluctant to chance?
Its a good question! If we got a strong Yen, and a strong equity market then it would be a fabulous bull market - and would prove the idea of changing politics driving investment flows into Japan.
What I have seen so far is that JGBs have weakened and Yen has weakened - which is the reverse of what we saw in the 2000s. I think this is because the Japanese government always wanted to pursue a strategy like this, but was hemmed in by US policy. Now that US policy is supportive, they can make this trade work.
My gut feeling though, is that long Yen is the new widowmaker trade - in that it does not strengthen - and instead we get inflation in Japan instead. That is what JGBs are telling you.
Hi Russell
If we postulate that the BoJ wants to inflate the debt away (don't all Central Banks?), and that Japan has lost competitiveness to China in the critical auto sector (just have a look at CN vs KR, JP auto exports), then it's clear the JPY has to remain weak and yields lower than other G7 counterparts.
Isn't this VERY bullish for the TOPIX (exporters), except that unlike in say, Turkiye (where domestic rates are astronomical) you also get a yield pick-up from hedging Yen into Dollars or Euros?
Doesn't that imply being super bullish on yen hedged equities?
Japan looks pretty competitive to me - cheap wages, cheap currency, and government is moving to "Japan First". Currency I am not sure about, but equities look good to me