TOKYO - Japan’s super-long-term government bond yields—covering 30- and 40-year maturities—have climbed sharply in recent months, reaching their highest levels in years. The upward momentum has also pushed up 10-year yields, which are commonly used as a benchmark in financial markets.
The shift is being attributed to a combination of domestic and international factors, with growing influence from overseas investors standing out as a key driver.
Speaking on the trend, Daiwa Securities Chief Market Strategist Kotani, who has over 20 years of experience in the bond market, outlined four main factors behind the rise. First, the nominal economic growth rate is a major determinant of long-term interest rates. Japan’s nominal GDP growth for fiscal 2023 was 3.7%, a figure that may appear high but includes inflation. This inflationary component supports higher long-term yields.
Second, the risk premium associated with Japanese government debt is expanding. Japan's fiscal position remains among the weakest of advanced economies, and with the ruling party losing its majority in the lower house last autumn, political uncertainty has further elevated risk.
The third factor is global financial instability. Since a major reshuffling in the U.S. Treasury market in April, concerns about U.S. fiscal sustainability—exacerbated by credit rating downgrades and tax cut debates—have fueled a worldwide reassessment of sovereign debt risk.
The fourth factor is structural changes in supply and demand. On the supply side, Japan’s Ministry of Finance has gradually shifted toward issuing longer-maturity bonds. Meanwhile, demand has weakened: the Bank of Japan has scaled back its massive bond purchases under its policy normalization efforts, reducing a major source of demand.
Among institutional buyers, life insurers traditionally invest in long-term bonds to match their long-term liabilities. However, a regulatory transition taking place from fiscal 2020 through 2023 forced these insurers to accumulate large amounts of long-term bonds. With the new rules now in effect as of this fiscal year, that buying pressure has largely subsided.
This shift in demand is having notable consequences. While the government holds significant volumes of super-long-term bonds, rising yields mean falling prices. As of the end of March, 13 state-affiliated institutions reported unrealized losses totaling 16.8 trillion yen on their bond holdings. Bonds issued 10 years ago with 40-year maturities have fallen to below half their original price.
Although these are only paper losses for now, they could materialize if the bonds are sold. The concern is that such losses may prompt some investors to sell preemptively to avoid further declines. However, insurers and other long-term holders are generally required to maintain assets that match their liabilities, limiting their ability to offload holdings freely.
In the longer run, rising yields may enhance the appeal of insurance products that offer stable returns, thereby bringing capital back into the super-long bond market and stabilizing demand.
Amid these shifts, foreign investors have emerged as a dominant force. Recent data show that foreign buyers have been purchasing more than 2 trillion yen worth of Japanese government bonds in some months—an unprecedented pace. The Japan Bond Market now faces a new dynamic in which the global investment community is playing an increasingly decisive role in shaping domestic interest rate trends.
Source: テレ東BIZ
