Japanese bond funds see record inflows as yields attract European buyers
FILE PHOTO: FILE PHOTO: A man looks at a board displaying Japan's 10-year government bonds level outside a brokerage in Tokyo, Japan, December 18, 2025. REUTERS/Kim Kyung-Hoon/File Photo
LONDON, Aug 25 : Japanese bond funds have seen record inflows this year as global investors, including from Europe, are attracted by the high yields on offer, although many remain wary of the trade and say bond prices can continue to fall.
Japanese government bond (JGB) yields have risen sharply in recent years, and prices have fallen, as inflation finally picks up, causing the Bank of Japan to raise interest rates. The Iran war, investor concerns about fiscal policy, and a very weak yen have been major drivers in 2026.
Data from Morningstar on Tuesday showed Japanese bond exchange-traded funds (ETFs), which are predominantly Europe-based and have a high exposure to JGBs, have attracted a record $1.5 billion in net inflows in the year to date, up from $550 million across the whole of 2025.
That reflected a growing appetite among European investors for fixed income assets and diversification away from the U.S., Morningstar said.
JGBS NOW AN INVESTMENT OPTION
BlackRock said earlier this month that its Europe-domiciled Japanese government bond (JGB) ETFs had seen $1.4 billion of inflows this year, driven primarily by large wealth investors. That compared to a net outflow of $58 million last year.
Meanwhile BNY, the world’s biggest custodian bank, said last week that its data showed non-Japanese-domiciled accounts have put $4.7 billion into JGBs this year, compared to $5.1 billion in 2025 as a whole. Net flows in July were $2.8 billion, the highest in more than a year, BNY said.
"From a foreign investor's perspective, the inflow into JGBs really started in 2025 and the trend has been ongoing," said Wee Khoon Chong, senior market strategist for Asia-Pacific at BNY.
"As JGB yields rise, it then becomes one of the investment choices."
Chong said foreign investors were also drawn to Japanese bonds because they can in effect receive higher yields when they hedge their currency exposure, due to the higher interest rates in Europe and the U.S. versus Japan.
Among foreign buyers, insurance companies, government institutions and central banks had increased their holdings the most, he added.
The 10-year JGB yield rose to 2.93 per cent earlier this month, its highest since the mid-1990s according to LSEG data. That's up from 2.1 per cent at the start of the year and 0.1 per cent at the start of 2022. Yields move inversely to prices.
It is now within striking distance of the symbolic 3 per cent-mark, following more than a decade of zero inflation and massive central bank debt purchases that kept Japan's bond yields around or below 0 per cent.
INVESTORS REMAIN CAUTIOUS
The flows remain very small compared to the size of the overall market, which stands at roughly $8 trillion, or 1,300 trillion yen, and many investors remain wary that yields could rise further.
Ales Koutny, head of international rates at Vanguard in London, said he maintains a short position — a bet that yields will rise — in shorter-dated JGBs in expectation that the Bank of Japan will need to raise interest rates relatively sharply.
Yet he said some longer-dated JGB yields, which at the 30-year point are above 4 per cent, were starting to look attractive.
Pictet Wealth Management is currently "underweight" Japanese government bonds, said fixed-income strategy lead Laureline Renaud-Chatelain, reflecting concerns about rising yields.
The Swiss investor is considering raising its exposure to a "neutral" level if the yen stabilises and the market begins to price in more BoJ rate hikes, Renaud-Chatelain said.
"It feels like since the beginning of August things are getting into place," she said.
The BoJ next meets in September and is widely expected to hike rates.
