BOJ’s Bond Buying Cuts Carve Out Opening for Japanese Investors

As the Bank of Japan slows debt purchases, local investors are doing just the opposite, limiting upward pressure on bond yields.

Private investors in the Asian nation bought a net ¥32.2 trillion of Japanese government notes in the 12 months though August, Bloomberg analysis of BOJ data showed. Net purchases by the central bank have fallen below zero as redemptions surpassed buying.

The pickup in private demand for Japan’s debt allays concern that a gradual reduction in BOJ support for the securities will lead to a sharper increase in yields. This may also bolster the central bank’s confidence that it can continue to slow bond purchases and raise the benchmark interest rate without triggering a market rout.

“Higher bond yields have made long-term investors more constructive on Japanese bonds,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd. in Tokyo. “As long as the rise in yields is moderate and gradual, I expect local private demand for the securities to continue to hold up.”

The BOJ said in July that it will reduce its debt purchases every quarter through March 2026 after abandoning its policy of yield-curve control. Buying will decrease to ¥2.9 trillion per month as a result, from ¥5.7 trillion in July, the central bank said.

The biggest buyer of Japanese government bonds has been trust banks in the past 12 months, which are often seen as proxies to pension funds because of the custodian role that they play. The Government Pension Investment Fund boosted holdings of the nation’s debt by 25% in the fiscal year ended March 31, separate Bloomberg analysis showed.

Japan’s bonds have lost 1.9% this year, while stocks gained about 11% after taking account of reinvested dividends. This suggests pension funds might have had to sell equities and buy debt to keep allocation to each asset within predetermined levels.

“Pension funds’ aggressive portfolio rebalancing is likely to have contributed to trust banks’ ballooning bond purchases,” said Tsuyoshi Ueno, a senior economist at NLI Research Institute in Tokyo. “The key to future demand for Japan’s bonds is whether banks and foreign investors will continue to increase their holdings as the BOJ gradually reduces debt purchases.”

Mitsubishi UFJ Financial Group Inc. will weigh “full-scale investment” in Japan’s government bonds when the 10-year yield and similar-tenor overnight-indexed swaps reach 1.2%, said Hiroyuki Seki, head of the bank’s markets business. Arif Husain, the head of fixed-income at T. Rowe Price, favors an overweight allocation to the securities on the view capital is likely to flow back to the nation as yields climb.

Sumitomo Mitsui Trust’s Sera said the BOJ will probably raise the policy interest rate again during Japan’s fiscal year ending March 31, pushing up the 10-year yield to slightly above 1%.

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