Foreign Investors Accelerate Japan Bond Purchases Amid Yield Curve Shifts

Foreign investors have acquired over ¥12 trillion ($75 billion) in Japanese government bonds since early November, marking the fastest inflow in over a decade. This aggressive buying has been concentrated in 10-year and 30-year JGBs, where the yield has dropped from 1.12% to 0.98% over a four-week period. The shift has coincided with a broader repositioning in global fixed-income portfolios, as investors seek yield in a low-rate environment. The influx has destabilized Japan's traditionally stable bond market, with 10-year JGB futures experiencing daily price swings exceeding 1.2%, the highest levels since 2018. Market participants attribute the volatility to the interplay between foreign demand and the Bank of Japan's continued yield curve control (YCC) policy, which keeps long-term yields anchored near 1%. As foreign demand outpaces domestic supply, the central bank's interventions have become more frequent, with 16 intervention operations recorded in December alone. The rapid capital inflow has also impacted broader financial conditions. The yen weakened against the dollar by 3.4% in the last month, reaching 156.20 per dollar, prompting concerns about currency stability. Japanese equities, particularly exporters, have reacted mildly, with the Nikkei 225 rising 1.8% over the same period, as lower long-term yields reduce discount rates for future earnings. Domestic institutions, including pension funds and insurance companies, have begun adjusting their asset allocations in response, reducing exposure to long-dated bonds and increasing holdings in shorter-duration instruments. Meanwhile, the Bank of Japan has signaled it may review its YCC framework if market distortions persist, raising uncertainty among global investors.