Japanese Investors Slowly Return to Domestic Assets Amid Bond Yield Uncertainty

Japanese investors are slowly returning to domestic assets as rising bond yields alter their investment calculations. According to Reuters, the flow of Japanese money back into domestic assets is gaining pace, but uncertainty over how high local bond yields will rise and how far the Bank of Japan may lift interest rates is keeping a larger repatriation of overseas assets on hold.

Deutsche Bank fixed-income strategist Shoki Omori noted that the unwinding of fast-money carry trades has largely taken place, while longer-term Japanese investors such as pension funds and households have yet to make significant shifts back into domestic assets. Benchmark 10-year Japanese government bond yields have climbed by about two percentage points in less than two years, reaching above 3% and their highest level in three decades.

The shift in Japan's bond market is changing the relative attractiveness of domestic and overseas assets. According to Barclays' analysis of data from the Japan Securities Dealers Association, Japanese investors purchased ¥4.8 trillion of sovereign debt in August, the largest net purchase in three months. Banks and insurers were among the buyers.

Japanese banks have also been reducing their foreign bond holdings, with HSBC estimating they have sold about $70 billion of overseas bonds this year, compared with purchases of $35 billion last year. The pace of repatriation could increase if Japan's largest institutional investors make a more decisive shift towards domestic assets.