Selling U.S. Treasuries, Buying Japanese Bonds: Wall Street Braces for "Capital Repatriation from Japan"

Original Author: Long Yue

Original Source: Wall Street Sights

Japan's government bond market is undergoing dramatic shifts not seen in decades, prompting global asset managers to re-evaluate a long-overlooked risk: could Japanese investors, holding about $1 trillion in US Treasuries, repatriate their money?

According to the latest report from the Financial Times, several investment institutions have begun preparing for a large-scale repatriation of Japanese capital, betting that Japanese investors will gradually sell US Treasuries and instead buy Japanese Government Bonds (JGBs) with continuously rising yields.

JGB Yields Surge to Multi-Decade Highs

On Friday, the benchmark 10-year JGB yield rose to 2.73% during trading, its highest level since May 1997.

Meanwhile, the 30-year JGB yield breached 4% for the first time—a level never reached since this maturity bond was first issued in 1999. The 5-year and 20-year JGB yields also hit new record highs earlier this week.

Japan's Finance Minister Satsuki Katayama told reporters on Friday that yields in major global bond markets are all rising, adding, "These dynamics interact, creating a compounding effect."

Analysts expect JGB yields to continue climbing. The Bank of Japan raised its policy rate to 0.75% in December last year, the highest in three decades, and the market widely expects a further 25 basis point hike to 1% this June.

The Trillion-Dollar Logic for Repatriation

Understanding this bet requires first understanding why Japanese investors hold such vast assets abroad.

For decades, Japan maintained ultra-low interest rates, offering almost no returns on domestic bonds. In pursuit of yield, Japanese institutional investors—including insurers, pension funds, and banks—ventured overseas on a massive scale, buying US Treasuries, European bonds, and various global assets.

Currently, Japanese investors hold approximately $1 trillion in US Treasuries, making them the largest foreign holders globally, far surpassing any other country.

Now, with JGB yields rising sharply, this logic is reversing. Mark Dowding, Chief Investment Officer at UK asset manager BlueBay, directly highlighted this shift. BlueBay launched its first-ever Japanese bond fund this March.

Dowding stated, "New funds will no longer be allocated overseas. Not to US corporate bonds, not to US Treasuries—they will come back to domestic Japanese allocations."

Funds Beginning a 'Trickle' Back Home

Market data shows signs of capital repatriation have already emerged, albeit on a small scale.

According to fund monitoring firm EPFR, investors poured a net approximately $700 million into Japanese sovereign bond funds in March, the largest single-month inflow on record for this category. Net inflows for April were $86 million, returning to recent normal levels.

Matt Smith, a fund manager at Ruffer, offered a more direct assessment. He said, "Pressure is building—long-end domestic yields are rising, and the signal from institutions is also 'bring your money back to Japan.' We think yen appreciation will happen slowly at first, then suddenly accelerate."

Smith added that Ruffer currently holds a long yen position as a core hedging tool. "Once market turmoil occurs, especially centered on US credit markets, Japanese investors will bring capital back home, and the yen will strengthen."

Repatriation Not Yet Large-Scale, JGBs Themselves Have Concerns

However, analysts caution that Japanese institutional investors are still net buyers of foreign bonds.

Abbas Keshvani, Asia Macro Strategist at RBC Capital Markets, noted that while JGB yields have "ostensibly offered investors better compensation," Japanese investors still net purchased approximately $50 billion of foreign bonds over the past 12 months.

The reason lies in the uncertainty of the JGB market itself. Japanese Prime Minister Shigeru Ishiba won an election in February, with campaign promises including expanded government spending and subsidies to counter inflationary pressures. Analysts increasingly warn that the government will be forced to compile a supplementary budget later this year, which would further depress JGB prices and push yields higher.

Keshvani stated, "Supply-demand dynamics all point to yields continuing to rise. As an investor, if you know yields will keep climbing, it's hard to have the desire to buy now."

Previously, the Bank of Japan was the market's most important buyer, purchasing large amounts of JGBs through quantitative easing and yield curve control policies. As the BOJ gradually exits, the market is reverting to traditional supply-demand logic, leading to significantly increased volatility in JGB prices.

What This Means for the US Treasury Market

The potential scale of Japanese capital repatriation means the US Treasury market must take this risk seriously.

Japan is the largest foreign holder of US Treasuries, with a position of about $1 trillion. Once Japanese institutional investors begin systematically reducing holdings, the impact on the supply-demand dynamics of US Treasuries will be substantial.

Currently, Wall Street's bets are more of a forward-looking positioning than a reaction to events that have already occurred. But as JGB yields continue to climb—analysts see a 10-year JGB yield reaching 3% later this year as a realistic target—the logic of this bet will become increasingly clear.