Selling U.S. Treasuries, Buying Japanese Bonds — Wall Street Braces for "Capital Repatriation" by Japanese Investors

Original Author: Long Yue

Original Source: Wall Street Journal

The Japanese government bond (JGB) market is undergoing dramatic shifts not seen in decades, prompting global asset managers to reassess a long-overlooked risk: Could Japanese investors, holding approximately $1 trillion in U.S. Treasuries, repatriate their capital?

According to the latest report from the Financial Times, several investment institutions have begun preparing for a large-scale repatriation of Japanese capital. They are betting that Japanese investors will gradually sell U.S. Treasuries and pivot to buying JGBs, whose yields are climbing.

JGB Yields Surge to Multi-Decade Highs

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

The 30-year JGB yield breached 4% for the first time ever—a level unseen since this maturity was first issued in 1999. Meanwhile, the 5-year and 20-year JGB yields also hit record highs earlier this week.

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

Analysts expect JGB yields to continue climbing. The Bank of Japan raised its policy rate to 0.75% last December, the highest in 30 years, and markets broadly anticipate a further 25-basis-point hike to 1% in June.

The Logic of a Trillion-Dollar "Repatriation"

Understanding this bet requires recognizing why Japanese investors hold such massive overseas assets in the first place.

For decades, Japan maintained ultra-low interest rates, leaving little to no return on domestic bonds. In pursuit of yield, institutional investors—including Japanese insurers, pension funds, and banks—ventured offshore en masse, buying U.S. Treasuries, European bonds, and a wide range of global assets.

Today, Japanese investors hold approximately $1 trillion in U.S. Treasuries, making them the largest foreign holders of U.S. debt by a wide margin.

Now, with JGB yields rising sharply, this logic is reversing. Mark Dowding, Chief Investment Officer at UK-based asset manager BlueBay, clearly articulates the shift. BlueBay launched its first-ever Japan bond fund in March this year.

Dowding stated, "New money will not be allocated overseas. It won't flow into U.S. corporate bonds or U.S. Treasuries. It will return to Japanese domestic allocations."

A "Trickle" of Capital Repatriation Has Begun

Market data suggests signs of capital repatriation are emerging, albeit on a modest scale.

According to data from fund monitor EPFR, investors poured a net inflow of approximately $700 million into Japanese sovereign bond funds in March, the largest monthly inflow on record for this category. In April, net inflows normalized to $86 million.

Matt Smith, a portfolio manager at Ruffer, offered a more direct assessment. "Pressure is building—long-end domestic yields are rising, and the institutional-level signal is also 'bring your money back to Japan.' We think yen appreciation will happen slowly at first, then all at once," he commented.

Smith added that Ruffer currently holds a long yen position as a core hedging tool. "Once market turmoil occurs, especially if it centers on U.S. credit markets, Japanese investors will repatriate capital, and the yen will strengthen at that point."

Full-Scale Repatriation Has Not Yet Occurred; JGBs Themselves Have Hidden Risks

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

Abbas Keshvani, Asia Macro Strategist at RBC Capital Markets, points out that while JGB yields "ostensibly offer investors better compensation," Japanese investors still made net purchases of approximately $50 billion in foreign bonds over the past 12 months.

The reason lies in the uncertainty surrounding the JGB market itself. Japanese Prime Minister Shigeru Ishiba won the election in February, with campaign pledges including expanding government spending and subsidizing 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 remarked, "Supply-demand dynamics both point to yields continuing to rise. As an investor, if you know yields will go higher, it's very difficult to have the appetite to buy now."

Previously, the Bank of Japan was the most significant buyer in the JGB market, purchasing heavily through quantitative easing and yield curve control. As the BOJ gradually exits, the market is reverting to traditional supply-demand logic, leading to markedly increased price volatility for JGBs.

What This Means for the U.S. Treasury Market

The potential scale of Japanese capital repatriation means the U.S. Treasury market cannot afford to ignore this risk.

Japan is the largest foreign holder of U.S. Treasuries, with holdings of approximately $1 trillion. If Japanese institutional investors begin to systematically reduce their holdings, the impact on the supply-demand balance for U.S. Treasuries would be substantial.

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