The Japanese government bond market is undergoing unprecedented volatility unseen in decades, prompting global asset managers to re-evaluate a long-ignored risk: could Japanese investors holding approximately $1 trillion in U.S. Treasuries begin repatriating their capital?

According to a recent report by the Financial Times, multiple investment institutions have already begun preparing for a large-scale return of Japanese capital to domestic markets, betting on Japanese investors gradually selling off U.S. Treasury holdings and reallocating toward Japan Government Bonds (JGBs), whose yields continue to surge.

JGB Yields Surge to Multi-Decade Highs

On Friday, the 10-year JGB yield climbed to 2.73% during trading—the highest level since May 1997.

The 30-year JGB yield has also breached 4% for the first time—unprecedented for this maturity since its inception in 1999. Both the 5-year and 20-year JGB yields hit record highs earlier this week.

Japanese Finance Minister Satsuki Katayama told reporters on Friday that sovereign bond yields across major global markets are rising, “with these dynamics interacting and amplifying each other through compounding effects.”

Analysts expect JGB yields to continue climbing. The Bank of Japan raised its policy rate to 0.75% last December—the highest level in 30 years—and the market widely expects another 25-basis-point hike to 1% in June.

The $1 Trillion "Return-to-Japan" Thesis

To understand this bet, one must first grasp why Japanese investors have amassed such vast foreign assets over decades.

For years, Japan maintained ultra-low interest rates, rendering domestic bonds nearly unprofitable. To pursue returns, institutional investors—including insurers, pension funds, and banks—ventured overseas, purchasing U.S. Treasuries, European bonds, and various global assets.

Currently, Japanese investors hold roughly $1 trillion in U.S. Treasuries—the largest foreign holding globally, far exceeding other nations.

Now, with JGB yields surging, this logic is reversing. Mark Dowding, Chief Investment Officer at BlueBay Asset Management, directly highlighted this shift. BlueBay launched its first dedicated Japanese bond fund in March this year.

Dowding stated: “New capital will no longer be allocated overseas. It won’t flow into U.S. corporate debt or U.S. Treasuries—it will return to domestic Japanese allocation.”

Funds Begin Slow but Steady Repatriation

Market data already shows early signs of capital returning, albeit on a small scale.

According to EPFR, investor net inflows into Japanese sovereign bond funds reached approximately $700 million in March—setting a record for the highest single-month inflow in the category’s history. Net inflows in April stood at $86 million, reverting to recent normal levels.

Matthew Smith, portfolio manager at Ruffer, expressed a more direct view: “Pressure is building—long-end domestic yields keep rising, and institutional signals are clear: ‘Bring the money back to Japan.’ We believe yen appreciation will initially occur slowly, then accelerate abruptly.”

Smith also noted that Ruffer currently holds a core long position in the Japanese yen as a key hedging instrument. “When market turbulence emerges—especially centered around U.S. credit markets—Japanese investors will repatriate capital, triggering yen strength.”

Repatriation Not Yet Massive; JGBs Themselves Pose Risks

However, analysts caution that Japanese institutional investors remain net buyers of foreign bonds at present.

Abbas Keshvani, Asia Macro Strategist at RBC Capital Markets, pointed out that despite JGB yields now offering “superficially better compensation,” Japanese investors still net bought about $5 billion in foreign bonds over the past 12 months.

This is due to uncertainty within the JGB market itself. Prime Minister Sanae Kato, who won election in February, pledged expanded government spending and inflation subsidies. Analysts increasingly warn that the government may be forced to draft supplementary budgets later this year—further depressing JGB prices and pushing yields higher.

Keshvani said: “Both supply-demand dynamics point toward continued yield increases. As an investor, if you know yields will keep rising, it's difficult to find motivation to buy now.”

Previously, the Bank of Japan was the market’s most important buyer via quantitative easing and Yield Curve Control. As the central bank gradually exits these policies, market dynamics are reverting to traditional supply-demand fundamentals, resulting in significantly heightened JGB price volatility.

Implications for the U.S. Treasury Market

The potential scale of Japanese capital repatriation has forced the U.S. Treasury market to take this risk seriously.

Japan is the largest foreign holder of U.S. Treasuries, with holdings of approximately $1 trillion. Should Japanese institutional investors begin systematic deleveraging, the impact on U.S. Treasury supply-demand dynamics would be substantial.

Currently, Wall Street’s positioning reflects forward-looking preparation rather than reaction to actual events. But as JGB yields continue to climb—analysts see a 3% yield on 10-year JGBs by late this year as a realistic target—the logic behind this bet will become increasingly compelling.

Original article: DeepChain TechFlow