Japan's election adds fuel to repatriation fire

Sumitomo Mitsui Financial,

29/01/2026 02:05

The author is a Reuters Breakingviews columnist.  The opinions expressed are his own.

By Hudson Lockett

HONG KONG, Jan 29 (Reuters Breakingviews) - Prime Minister Sanae Takaichi’s decision to call a snap election next month has triggered concerns of fiscal profligacy, dragging down the yen and pushing government bond yields to historic highs. That has prompted fears that juicier returns on local debt may tempt investors in Tokyo to pull their money from abroad. The mere possibility of a change is worth getting ahead of.

Concerns over Japanese financial repatriation are reasonable, simply because the sums are so large. The country is one of the world's biggest creditors, largely because decades of low local interest rates pushed yield-seeking money abroad. Its investors are estimated to hold over $2 trillion of foreign long-term bonds, on top of another $1 trillion in reserves, according to Brad Setser, a senior fellow at the Council on Foreign Relations. U.S. official data lists Japanese residents as the largest owners of Treasury securities, with $1.2 trillion as of November. Sudden dumping by pension funds, insurers, banks and asset managers could therefore wreak havoc. Repatriation would be particularly disruptive for long-dated sovereign debt, where Japanese investors play an outsized global role.

Yet swapping Treasuries, German bunds and UK gilts for Japanese government bonds is complicated by a host of factors, chief among them local market scale and depth. The Bank of Japan still owns half of outstanding bonds, meaning investable Japanese government debt totals about 55 trillion yen ($3.6 trillion), or roughly a tenth of the $30 trillion market for U.S. Treasuries.

The BOJ’s role as top holder and regular buyer of government bonds also saps liquidity from the market, particularly for long-term debt, making prices prone to violent moves. During a recent local meltdown, Bloomberg’s dislocation index for Japanese government bonds shot to its highest level on record, indicating that yields were a tenth of a percentage point lower than they would be with sufficient liquidity.

For any Japanese investors that sell long-dated foreign bonds to buy domestic ones with similar maturities, there's a risk of sudden bouts of volatility. That's especially the case if Takaichi’s Liberal Democratic Party sweeps the election and her grand fiscal ambitions are realised.

In any case, Japanese investors will look for greater clarity on Tokyo’s spending plans after the February 8 election. Prashant Bhayani, Asia chief investment officer at BNP Paribas Wealth Management, doesn’t expect a rush back to the local market, however: “These kinds of investors – especially insurance companies, pension funds – they don’t move all at once. These flows play out over many years.”

But returns have undeniably begun to look tempting, with Japanese 10 and 30-year government benchmark yields hitting 2.2% and 3.6%, respectively. In December Toru Nakashima, CEO of Sumitomo Mitsui Financial Group 8316.T, told Reuters the company would start gradually boosting exposure to local state debt if the 10-year yield rose “a bit further” and stabilised. Those words, coming from the head of Japan’s second-largest banking group, are reason enough for global investors to consider what a steady drawdown in Japanese demand for foreign assets would look like—slow though it may be.

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CONTEXT NEWS

Japanese government bonds rallied on January 28, as yields hovering near record highs drew strong demand at an auction of super-long-term debt. Yields on 40-year bonds fell 0.04 percentage points to 3.9% following a sale, while those on 10-year bonds fell about as much to 2.3%. Yields on 40-year debt had surpassed 4% on January 20 for the first time since the ultra-long maturity’s debut in 2007, amid concerns that Prime Minister Sanae Takaichi’s snap election would facilitate tax cuts and more fiscal spending for the deeply indebted economy.

Narrowing gap between Japanese and U.S. 10-year yields https://www.reuters.com/graphics/BRV-BRV/klvyjymmrpg/chart.png

(Editing by Liam Proud; Production by Aditya Srivastav)

((For previous columns by the author, Reuters customers can click on LOCKETT/ hudson.lockett@thomsonreuters.com))