Japanese bond market: new yield environment, new ownership structure.
We believe that investors’ concerns about financial stability and debt sustainability in Japan, as well as the potential spillovers from JGBs to other global bond markets are overstated.
Our view is that the Japanese bond market is transitioning to a different regime compared to the one prevailing since the 1990s, characterised by:
A new yield environment. JGB yields are returning to levels last seen at the start of the deflationary era in Japan (around 1995), reflecting on the one hand the rise in inflation and on the other hand, the Bank of Japan’s ongoing monetary tightening.
A new ownership structure. A structural change in ownership of JGBs is underway. The BoJ is gradually reducing its balance sheet, but domestic investors are less active than in the past in absorbing supply. This leaves foreigners, the most price-sensitive category, as marginal investors. As we have learned from the US and the Euro Area bond markets, a shift in ownership from price-insensitive to price-sensitive investors typically result in higher yields and higher term premiums.
Bottom line: We believe that JGB yields could rise further, especially at the long end. That said, we expect upward pressure on bond yields to remain largely a domestic phenomenon.
Against this backdrop, we would tentatively start gradually accumulating JGB at 2.50% (10Y).
Chiara Cremonesi
Senior Rates Strategist
Investment Research
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