Multiple leading Japanese asset management companies are expected to announce plans to increase their holdings of domestic bonds, and the market is closely watching whether they will step up reductions of overseas assets to drive capital back home.
Analysts say that although a massive asset reallocation is not expected, a sustained flow of capital back to Japan could provide support for the yen; for now, changes in Japanese demand are being watched closely because they could ripple through overseas markets.
In recent months, as the Takaichi Sanae government has strived to support the yen, which fell to a 40-year low in July, the prospect that Japan may repatriate some of its overseas allocation funds has continued to draw market attention. According to data from the Life Insurance Association of Japan, Japanese life insurers manage about $2.5 trillion in assets, about a quarter of which is held in overseas assets. With yields surging, several companies have recently signaled that they are looking at domestic bonds.
Keita Matsumoto, head of financial markets at SMBC Nikko Securities, said: "I don't think there is currently a trend of capital repatriation involving selling foreign bonds and buying Japanese government bonds." "(Life insurers) are cautiously increasing their JGB exposure... their strategy remains to buy on dips when yields rise."
Data from Japan's Ministry of Finance shows that Japanese investors were net sellers of more than 5 trillion yen (about $32 billion) of foreign bonds this year, of which about 289 billion yen came from life insurers.
In Japan, the 10-year JGB yield, which was still suppressed by the central bank more than two years ago, has now tripled and exceeded 3% for the first time in 30 years.
Shoki Omori, chief fixed income strategist for Japan at Deutsche Bank, said that as the 30-year JGB yield consolidates around 4%, domestic insurers may increase buying; and a rise in hedge ratios could be a precursor to selling foreign bonds.
Omori said: "They will remain cautious while the Bank of Japan is still raising rates. Some institutions will let hedged foreign bonds naturally shrink as they mature. I don't expect broad selling of foreign bonds and converting the funds back into yen." He added: "Higher yields have brought buyers back to the JGB market, but they have not brought funds back home."
It is still too early to act now
Nippon Life, Meiji Yasuda Life and Dai-ichi Life together manage nearly 220 trillion yen in assets, and they are expected to announce investment plans next week.
This year, inflation, rising sovereign debt and growth expectations boosted by the AI boom have pushed yields in developed economies sharply higher. In Japan, Takaichi Sanae's spending plans and tax cut promises have also intensified market concerns.
A year ago, major Japanese life insurers said they expected to reduce their yen-denominated bond holdings, and the subsequent rise across the entire yield curve showed that the market had not yet found a bottom.
Tetsuji Hayashi, a product specialist in the investment division at Sumitomo Mitsui DS Asset Management, said that Japanese institutions, which sharply cut JGB holdings during the negative interest rate era, are gradually reassessing the domestic market.
Hayashi said: "We are beginning to see a shift of funds back to yen bonds. As interest rates rise, the 10-year JGB yield has exceeded the currency-hedged 10-year U.S. Treasury yield."
The Bank of Japan last month raised its key interest rate to a 31-year high, and many analysts expect the BOJ to hike again before the end of this year amid spreading price pressures and persistent concerns about a weak yen.
An asset management official at a major life insurer said that as the Bank of Japan reduces bond holdings and tightens policy while Japan's fiscal position remains unstable, supply-demand dynamics across all JGB maturities remain worrying. The official said Japanese bond yields have risen to "quite attractive levels" but have not yet peaked.
The official said: "It is still too early to act now. The Bank of Japan has not finished raising rates, and fiscal concerns have not dissipated."
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