Japanese bonds look more attractive, but uncertainty reigns
September 16, 2025
-
4 min
Global investors have flocked to longer-dated Japanese debt so far this year as yields have risen and confidence in the safe-haven status of US treasuries has fallen. But, while there are compelling reasons to invest, there is also cause for caution and the need for an active approach for both local and global investors.
The rise in Japanese Government Bond (JGB) yields is notable after years of negative interest rates. In January 2025, the Bank of Japan raised its short-term policy interest rate from 0.25% to 0.5%. The rise was driven by inflationary pressures and expectations of stronger wages growth in Japan.
With the rise in inflationary expectations, the yield on the 10-year government bond reached around 1.61% by late August 2025, up almost 100 basis points from a year earlier. Japan’s 30-year bond yield jumped to an all-time high around 3.2%, after rising 112 basis points from a year ago, as traders price in greater inflation[i].
International capital flowing to Japan
In the first seven months of this year, global investors poured a record 9.3 trillion yen (US$63 billion) into longer-dated Japanese debt[ii] driven by worries over the potential of a gradual, global slowdown, persistent uncertainties over US trade policy and geopolitical tensions. They have also been attracted by Japan’s economy, which has been gaining momentum this year. Yields on longer dated bonds have been rising, with the 30-year JGB pricing to a 30-year high on the back of greater inflation and widening government deficits. At the same time, the Bank of Japan has scrapped its control of the yield curve, which had acted as a cap on Japanese bond yields for several years.
Hank Lynch, Global Strategist with Loomis Sayles’ Global Fixed Income Team, says this has been attracting capital.
“With the Bank of Japan still in hiking mode, and most other central banks in easing mode, it would be wise to target a broad exposure to Japanese government bonds,” says Lynch.
“A strategy of averaging into 20–30-year bonds as the 30-year bond rises above 3% and toward 3.25-3.5% is increasingly compelling; a level arguably closer to fair rather than the rich valuation levels of the past decade,” he adds.
David Rolley, Co-Head of the Global Fixed Income Team at Loomis Sayles, expects this trend to continue for two reasons: “As greater Asia may be the world's fastest -growing mega-region, Japanese economic growth may speed up rather than slow down, despite a declining total population,” says Rolley. He adds: “The US voter population is deeply divided. This may continue to limit any real effort to reduce US Federal Government deficits. When you refuse to pay other taxes, inflation is the ultimate tax you end up paying.”
We have yet to reach the peak for Japanese rates
According to Loomis Sayles and DNCA Finance experts, upward pressure remains on official Japanese interest rates as economic growth gains momentum. The peak in Japanese government bond yields may still rest 25 or more basis points above current levels. This would potentially add to the investment appeal of longer-end bonds, with active management adding to potential gains on bonds and currency trades, as well as managing risks more efficiently.
Daniel Claringbull, Global Product Manager with DNCA Finance, says with the recent acceleration in Japanese economic growth, the Bank of Japan could raise interest rates again as soon as October, with more than 10 basis points now priced into short-end bonds.
“However, beyond the macroeconomic data, the Bank of Japan will need more certainty about domestic policy and the profile of future government debt issuance before raising rates again. After nearly 30 years of near-zero inflation, the central bank will prefer to be patient rather than risk compromising the price-wage loop that appears to be taking shape,” Claringbull says.
Bo Zhuang, Global Macro Strategist, Asia, Loomis Sayles, agrees that official rates may rise again, but expects a rise in 2026. “The next Bank of Japan rate hike is expected in early 2026, keeping near-term policy accommodative. Super-long Japanese government bonds remain volatile, driven by persistent demand-supply imbalances and heightened election-related uncertainty,” he says.
Another support for longer maturity bonds, apart from strong foreign buying, is Japan’s move to reduce bond issuance. While fiscal sustainability concerns have grown amid Japan’s large debt burden and ongoing political debates over tax cuts, Japan’s government net interest payments are “modest by global standards, and its fiscal capacity remains robust”, adds Zhuang.
What is the best way for investors to allocate in the current environment?
David Rolley believes active management is essential to provide diversification while also meeting current market challenges, saying that diversifying away from US assets into Japanese government bonds could make good sense for investors who hold relatively high allocations of US Treasuries. “That level of concentration is high globally, we believe,” he says.
At the same time, Japanese investors and others already holding JGBs may also benefit from diversification. Despite the surge in yield for Japanese bonds, the yields on US Treasuries remain considerably higher, even after hedging against the Japanese yen. And hedging costs for Japanese denominated assets may fall in future due to differences in monetary policy between Japan and the US.
However, caution is needed. The Japanese central bank has been easing back on JGB purchasing, which has extinguished a primary source of demand. “This tapering adds to market demand challenges,” says Lynch. Added to that, institutional investors would need to take on the exchange rate risk at a time when the Japanese yen is being undervalued by many measures.
“While tactically Japanese government bonds may perform OK, should a global slowdown ensue in the coming year, one which pauses further policy tightening by the Bank of Japan, the medium term prospects of generating a return greater than inflation are not great until clearer evidence emerges that the Bank of Japan has completed its job of bringing policy rates to a level near estimates of ‘neutral’ for Japan’s economic structure,” says Lynch.
In Natixis Investment Managers 2025 Wealth Industry Survey 62% of wealth managers said active investments on their platforms outperformed passive over the past year. With the macro environment remaining volatile, and interest rate movements uncertain, it’s easy to see why 73% of wealth managers believe active management is essential to navigating today’s fixed income environment.
