Rising Japanese Yields Attract Domestic Investors

Tokyo's rising bond yields are making domestic assets more attractive to Japanese investors. The Bank of Japan (BOJ) is expected to raise its policy rates faster than market consensus in 2026 and 2027, supporting the yen and Japanese debt.

The benchmark 10-year Japanese government bond yield hit 3% last week for the first time since September 1996, driven by concerns about inflation, fiscal health, and pressure on BOJ rate hikes. Markets have priced in a near-certainty of a rate hike to 1.25% at the central bank's meeting next week.

Fitch Ratings analysts led by Monsur Hussain say higher local yields will reduce the incentive for domestic institutions to chase lower-yielding foreign assets. Japanese megabanks are cautiously rebuilding their JGB holdings, while life insurers are selling existing lower-coupon bonds to reinvest in higher-coupon securities.