BOJ’s Hawkish Stance and Foreign Investors’ Growing Prospects in Japanese Bond Market

Following a surprisingly hawkish stance by the Bank of Japan and a decrease in concerns regarding Japan’s public finances, foreign investors have seen a boost in their investments in super-long Japanese government bonds over the past seven months. With bets on the flattening of the Japanese government bond yield curve paying off, shorter-term yields have extended gains while those of super-long 20- and 30-year bonds have fallen from historic levels.

The recent twist flattening of the yield curve, where long-term interest rates decrease and short-term rates rise, has resulted in a reversal of fortunes in the JGB market. This shift has been influenced by delays in the BOJ’s tightening cycle and growing worries about the nation’s debt burden.

According to Masayuki Koguchi, executive chief fund manager at Mitsubishi UFJ Asset Management, the yield curve in Japan may continue to flatten as mid-term interest rates are too low while super-long bond yields face challenges in the market. This potential shift in the curve has led to increased profits for those positioned for flattening, particularly for foreign investors who made significant purchases of Japan’s ultra-long-dated bonds when yields hit record highs earlier this month.

Although short-term JGB yields rose significantly recently, super-long JGB yields have decreased from historic levels. The resignation of Prime Minister Shigeru Ishiba, known for his fiscal hawkishness, and the adjusted stance on fiscal outlook by Liberal Democratic Party leadership candidate Sanae Takaichi have also impacted the bond market positively.

Despite ongoing political uncertainty and upcoming elections to determine Japan’s next prime minister, foreign investors have continued to show interest in super-long JGBs. Their consistent purchases of these maturities for an eighth straight month through August indicate growing confidence in the Japanese bond market. With 30-year JGBs approaching fair value and yields on shorter-dated bonds still not reflecting potential rate hikes, the market continues to evolve.

As the situation in Japan progresses, investors will closely monitor developments in the bond market and adjust their strategies accordingly. The recent changes in the yield curve and the political landscape highlight the dynamic nature of the Japanese bond market and the opportunities it presents to foreign investors.