Selling U.S. Treasuries, Buying Japanese Bonds: Wall Street Prepares for “Repatriation of Japanese Capital”

The Japanese government bond (JGB) market is undergoing dramatic shifts unseen in decades—prompting global asset managers to reassess a long-overlooked risk: Will Japanese investors, who hold roughly $1 trillion in U.S. Treasuries, bring their money home?

According to a recent Financial Times report, several investment firms have begun preparing for a large-scale repatriation of Japanese capital, betting that Japanese investors will gradually sell U.S. Treasuries and instead buy Japanese government bonds (JGBs), whose yields are rising steadily.

JGB Yields Surge to Multi-Decade Highs

On Friday, the yield on Japan’s benchmark 10-year JGB rose to 2.73% intraday—the highest since May 1997.

The 30-year JGB yield breached 4% for the first time—reaching a level never seen since the maturity’s inception in 1999. Yields on both 5-year and 20-year JGBs also hit record highs earlier this week.

Japanese Finance Minister Satsuki Katayama told reporters on Friday that yields across major global bond markets are rising, “and these dynamics interact, producing a compounding effect.”

Analysts expect JGB yields to continue climbing. The Bank of Japan raised its policy rate to 0.75% in December last year—the highest in three decades—and markets broadly anticipate another 25-basis-point hike to 1% in June this year.

The Logic Behind the $1 Trillion “Repatriation”

To grasp this bet, one must first understand why Japanese investors hold such massive overseas assets.

For decades, Japan maintained ultra-low interest rates, rendering domestic bonds virtually unprofitable. To seek yield, Japanese insurers, pension funds, and banks aggressively invested abroad—buying U.S. Treasuries, European bonds, and other global assets.

Today, Japanese investors hold approximately $1 trillion in U.S. Treasuries—the largest foreign holder globally, far exceeding any other country.

Now, as JGB yields surge, that logic is reversing. Mark Dowding, Chief Investment Officer at UK-based asset manager BlueBay, has directly highlighted this shift. BlueBay launched its first dedicated Japanese bond fund just this March.

Dowding said: “New inflows will no longer be allocated overseas—not to U.S. corporate bonds, not to U.S. Treasuries—but will instead be directed back into domestic Japanese assets.”

Capital Is Already Trickling Home

Market data shows early signs of capital repatriation—albeit still modest in scale.

According to EPFR, a fund-flow monitoring firm, investors poured around $700 million net into Japanese sovereign bond funds in March—a record monthly inflow for the category since records began. In April, net inflows moderated to $86 million, returning to recent normal levels.

Matt Smith, portfolio manager at Ruffer, offered a more direct assessment: “Pressure is building—long-end domestic yields keep rising, and institutional signals clearly say ‘Bring your money back to Japan.’ We expect the yen’s appreciation to begin gradually, then accelerate sharply.”

Smith added that Ruffer currently holds a long yen position as a core hedge: “Once market turbulence hits—especially centered on the U.S. credit market—Japanese investors will repatriate capital, and the yen will strengthen.”

Large-Scale Repatriation Has Not Yet Begun—JGBs Themselves Carry Risks

Still, analysts caution that Japanese institutional investors are, in fact, still net buyers of foreign bonds.

Abbas Keshvani, Asia Macro Strategist at RBC Capital Markets, noted that although JGB yields now “superficially offer investors better compensation,” Japanese investors have still net purchased about $50 billion in foreign bonds over the past 12 months.

The reason lies in underlying uncertainty within the JGB market itself. Prime Minister Shigeru Ishiba won February’s election on a platform promising expanded government spending and subsidies to ease inflationary pressure. Analysts increasingly warn that the government may be forced to pass a supplementary budget later this year—further depressing JGB prices and pushing yields higher.

Keshvani said: “Both supply and demand dynamics point toward continued yield increases. As an investor, if you know yields will keep rising, it becomes difficult to justify buying now.”

Previously, the Bank of Japan was the market’s most important buyer—massively purchasing JGBs through quantitative easing and yield curve control. As the BOJ gradually exits those policies, the market is reverting to conventional supply-and-demand dynamics, resulting in markedly increased JGB price volatility.

What This Means for the U.S. Treasury Market

The potential scale of Japanese capital repatriation forces the U.S. Treasury market to take this risk seriously.

Japan is the largest foreign holder of U.S. Treasuries, with holdings totaling roughly $1 trillion. Should Japanese institutional investors begin systematic reductions, the impact on U.S. Treasury supply-and-demand dynamics would be material.

For now, Wall Street’s positioning reflects more of a forward-looking bet than a reaction to already-occurring events. But as JGB yields continue climbing—and analysts view a 3% yield on the 10-year JGB by late this year as a realistic target—this bet’s logic grows increasingly compelling.