Japanese Bonds See Largest Foreign Inflows in 8 Months Amid Rising Yields

Japanese government bonds have seen the largest foreign investment inflows in nearly eight months, driven by rising yields to levels attractive to international investors, as the Bank of Japan continues to reduce its market support through quantitative tightening.

Preliminary data from the Japanese Ministry of Finance shows that foreign investors' net purchases of Japanese bonds amounted to approximately 1.41 trillion yen (about $9.1 billion) last week, the highest level since the week ending April 11.

Strong demand was also highlighted during the 20-year bond auction on December 11, where the bid-to-cover ratio reached its highest level in five years, indicating growing investor appetite for long-term debt instruments.

Reports suggest that foreign investors are on track to record the largest annual purchases of Japanese government bonds since at least 2005, benefiting from yields that are the highest in decades and hedging gains against fluctuations in the yen.

This shift occurs as the Bank of Japan reduces its market interventions by scaling back quantitative easing programs, leading foreign investors to fill an increasing part of the funding gap, which may add greater volatility to a market that has long been characterized by relative stability.

Akira Moruga, chief market strategist at Aozora Bank in Tokyo, noted that foreign demand for Japanese bonds has increased as yield levels have become attractive enough, adding that even if the Bank of Japan continues to raise interest rates, long-term bond yields may remain high and appealing.

Economists expect the Bank of Japan to raise interest rates by 25 basis points to 0.75% at its upcoming meeting, while overnight index swaps (OIS) reflect expectations for further rate hikes by October 2026.

It is noteworthy that the weekly data from the Ministry of Finance does not provide precise details by bond type, investor category, or geographical distribution, but the overall trend reflects a structural shift in demand for Japanese debt as the role of foreign investors increases.