Japanese Investors Exit UK Bonds at Fastest Pace Since 2011 Amid Fiscal Anxiety

Japanese institutional investors have pulled £7.2 billion from UK government bonds in December 2025, marking the most significant outflow since records began in 2011. The move reflects heightened caution over the UK’s widening fiscal deficit, projected to reach 6.8% of GDP in 2025-26, and the sustainability of public debt, which now stands at 102% of GDP. This exodus has significantly impacted the UK’s fixed income market, with the 10-year gilts yield rising to 4.82%—its highest level since 2023—increasing the cost of sovereign borrowing. The sell-off coincided with a sharp depreciation of the British pound, which fell to €1.1730 against the euro (GBPEUR) and touched 149.60 against the US dollar (USD/JPY). The weakening pound reflects both capital flight and broader market skepticism about UK economic policy, particularly around tax reform and public spending. UKGILT futures have also declined, signaling expectations of higher inflation and tighter monetary policy in the near term. The shift underscores a growing divergence in risk appetite between Japanese and European financial markets. While Japanese investors remain cautious about high-debt sovereigns, they are actively increasing exposure to US Treasuries and German bunds. This reallocation has intensified pressure on UK debt markets, which are already grappling with a heavy issuance calendar and subdued domestic demand. The developments have drawn attention from UK policymakers and the Bank of England, which is now under increasing pressure to address fiscal credibility. The scale of the outflow, particularly from a traditionally stable investor base, raises concerns about long-term market access and financial stability. Traders are now closely monitoring upcoming fiscal statements and the Bank’s next rate decision.