Japan Confronts Biggest Bond Loss Globally as BOJ Rate Hikes Upend Market

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Japan Confronts Biggest Bond Loss Globally as BOJ Rate Hikes Upend Market.

bonds :: 2025-03-31 :: source - bloomberg

By Mia Glass and Masaki Kondo

(Bloomberg) -- Investors are rethinking their strategies for Japanese sovereign bonds after the Bank of Japan’s pivot to interest-rate hikes in the past year triggered the biggest losses among global debt markets.

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Key to their shift is the outlook for bond yields in the next 12 months, with some market participants predicting that benchmark 10-year borrowing costs won’t climb as sharply as the fiscal year that ends today, when rates more than doubled. In the latest potentially bearish news for Japan’s debt market, the central bank announced Monday that it would reduce buying of super-long bonds due in 10 years to 25 years.

Japanese notes lost 5.2% over the past year when fluctuations in exchange rates aren’t considered, the worst performance among 44 global markets tracked by Bloomberg. That’s the sixth straight year of losses for Japan’s sovereign debt, and the biggest since 1990, as the BOJ hikes rate when other central banks are cutting them.

“Japan’s yields used to move in line with US yields or other overseas yields,” said Yurie Suzuki, a market analyst at Mizuho Securities Co. “But there were a lot of cases this past year where Japan’s yields rose even when US yields were falling” due to diverging policy paths, she said.

A steady rise in yields have prompted investors such as Pacific Investment Management Co. and the National Mutual Insurance Federation of Agricultural Cooperatives to rethink their stance toward Japan’s ¥1,138 trillion ($7.6 trillion) bond market. Some fund managers expect the 10-year yield to climb as high as 2% from 1.545% on Friday.

The losses come after the BOJ raised rates three times since scrapping the world’s last negative interest rate policy last March. Other central banks from the US to the euro region are easing monetary policy, with Switzerland’s interest rates now below those of Japan.

In a move that may push up the supply of longer bonds in the market, the BOJ will buy ¥405 billion of debt due in 10 years to 25 years every month in the April-June period, according to a statement from the central bank released on Monday. That’s lower than ¥450 billion in the first quarter and marked the first cuts for these tenors since January 2024.

While the reductions were in accordance with the BOJ’s long-term plan of quantitative tightening, smaller support from the largest holder of government debt bodes ill for the securities.

Japan’s yields have hit multi-year highs, with the 10-year rate rising to its peak since 2008 last week.

“The trend is for gradually higher rates,” said Shinichiro Kadota, head of Japan FX and rates strategy at Barclays Securities Japan Ltd. “But we have seen a significant move already over the last year so, in that sense, I think the pace of the selloff in JGBs will be milder than the past 12 months.”

A Bloomberg survey of economists and strategists shows the 10-year yield is expected to finish the fiscal year through next March at 1.66%. Should this play out, an investor who buys the securities today will still gain 0.6%, according to Bloomberg-compiled data.

The shift toward higher bond yields after decades of ultra-low rates is carving out opportunities for foreign investors in particular in the Japanese market, which, excluding inflation-linked notes, is bigger than those of the UK, France and Italy combined.

JGBs with tenors of more than 10 years drew record foreign inflows in February, according to the latest data from the Japan Securities Dealers Association.

The yield pick-up on longer-maturity Japanese bonds makes them more attractive than US debt for European investors who hedge currency risk, Yann Lepape, head of global macro strategy at Alphavalue and SARIM, said in an interview.

Some strategists see Japan’s yields declining later this year. Mizuho Securities’ Suzuki says that the market may be overpricing the number of BOJ rate hikes.

“There is a good chance that the BOJ will move in July, so I think there is a possibility that we will see another temporary rise in yields,” said Suzuki. “But I think that as expectations of rate hikes fade, yields will start to fall from around the second half of the year.”

Still, given that BOJ Governor Kazuo Ueda has said he wasn’t overly concerned about the recent upward march in yields, there’s a chance they may even surpass those of China, which is confronting a “Japanification” situation that resembles Japan’s lost decades of falling prices, stagnant business activity and depressed consumer spending.

“Yields are starting to return to levels that match fundamentals,” said Masayuki Koguchi, executive chief fund manager at Mitsubishi UFJ Asset Management Co. Next year’s performance may be even worse as that adjustment continues, he said.

(Adds BOJ’s planned reduction of super-long bond buying in seventh paragraph.)