Japan’s Bond Market Reawakens After Decades on the Sidelines

Yields on Japanese government bonds have climbed to levels not seen in decades, with the benchmark 10-year yield last week reaching its highest point since 1996.

The sell-off in Japanese bonds has been driven by the Bank of Japan’s shift toward policy normalization, alongside investor unease over Japanese Prime Minister Sanae Takaichi’s spending agenda. Even so, some market specialists say the asset class is becoming worth a fresh look.

“JGBs are increasingly moving from ‘uninvestable’ to ‘investable’ for global bond investors,” said Masahiko Loo, senior fixed income strategist at State Street Investment Management.

Loo noted that yields at multi-decade highs mean investors are “finally” being compensated again for holding Japanese government debt.

The 10-year JGB yield rose to 2.901% last Thursday and is now trading around 2.781%, more than 70 basis points above where it began the year. The 20-year JGB yield also touched 3.901% last Thursday.

For years, JGBs were shaped by the Bank of Japan’s yield curve control framework, which targeted the 10-year yield at “around zero” as policymakers tried to reflate the economy. Japan scrapped YCC in March 2024 as part of its broader move to normalize monetary policy.

Hong Kong-based research firm Gavekal’s co-founder Charles Gave said in research note last week that Japanese government bond yields were higher than where they should be.

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

Investors should move toward a “balanced” Japan portfolio if they have no holdings in Japan, with 50% equities and 50% in bonds, other investors should also replace their euro and U.S. bonds, as well as gold, with long-dated Japanese bonds, Gave said.

“Pretty soon, Japanese yields will start falling and the yen will start to go up, especially if oil remains at its current price. Long-duration Japanese bonds should therefore significantly outperform gold in yen terms for the foreseeable future,” he added.

Some analysts, however, differ on the attractiveness of Japanese bonds.

Henning Potstada, global head of multi-asset at Germany-based asset manager DWS said that other bond markets, such as European bonds, were still more attractive due to a higher policy rate. The European Central Bank, Potstada pointed out, has rates at 2.25%, compared to the BOJ’s 1%.

Postada added that debt sustainability was more of a concern for Japan, with Tokyo’s debt-to-GDP ratio of above 200% compared to 81.7% for the EU. “If you have European positions stay or even do more in Europe, because the debt sustainability issues, we think will hold on, and exactly for these investors, Europe offers stability.”

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

“Foreign investors have piled back into the 20- to 30-year segment as yields broke above 3.5%, with a record 9.3 trillion yen flowing into longer dated Japanese debt in 2025 alone,” she said in an email. “The 10-year at around 2.87% is approaching what most major houses consider fair value, broadly in line with Japan’s growth and inflation outlook.”

Ultra-long positions are, however, a “live risk.”

“Life insurers become forced sellers if the 30-year breaches 4.5%, so that level is simultaneously an opportunity and a danger zone,” Hyslop said. “GPIF, the world’s largest pension fund, remains the most consequential potential buyer and any reallocation into domestic bonds from its $1.8 trillion pool would be a powerful stabilizing force.”

Hyslop told CNBC that these shifts had structural implications for the global bond market. “Japan spent two decades as the silent subsidizer of cheap global borrowing. That era is over,” she said.

Last Friday, Japanese Finance Minister Satsuki Katayama reportedly said the Tokyo would seek ways to encourage pension funds, including GPIF, to make “substantially greater investments in Japanese financial assets.”

While the government was exploring ways to boost such investments, there is no immediate revisions to GPIF’s medium-term objectives, according to a Reuters report.

“As domestic yields rise, Japanese investors are repatriating capital, selling $29.6 billion of U.S. debt in the first quarter of 2026 alone and removing a historically reliable buyer from markets already navigating large fiscal deficits.”

John Sidawi, senior portfolio manager for global fixed income at Federated Hermes, told CNBC via email that despite Japanese 10-year bond yields touching multi-decade highs, a “confluence of uncertainties” is still deterring nominal demand. 

“Namely, newly founded fiscal pressures and the general position that the Bank of Japan is still behind the curve [on raising rates],” he said. “This dynamic is further exacerbated by Middle East geopolitical tensions which have been exerting upward pressure on global yields in general.”