JGB Investors Eye 2.5% Yield After Japan's Election

Major investors may soon end their "buying strike" on long-term Japanese government bonds (JGBs) following this weekend's snap election, with a specific yield target emerging as the key trigger for their return.

Jordan Rochester, head of macro strategy at Mizuho in London, noted that some of Japan's largest investors are waiting on the sidelines for yields to climb slightly higher. He said the uncertainty surrounding the election has kept them at bay, but that could change quickly.

The 2.5% Trigger for Asset Managers

During a recent visit to Tokyo, Rochester found a "near unanimous consensus" among life insurers, asset managers, and banks. The consensus view is that a rise in the 10-year JGB yield toward 2.5% would represent a good buying opportunity.

Currently, these yields are hovering around 2.25%. They had previously climbed to 2.38% last month—the highest level since 1999—in the lead-up to Prime Minister Sanae Takaichi's surprise election announcement.

Election Impact on Investor Sentiment

A decisive election result that consolidates Takaichi's support would clear the path for increased government spending aimed at stimulating the economy. However, some domestic investors have been avoiding the long end of the bond market due to rising fiscal concerns and surging volatility.

The absence of traditional major buyers like life insurers and pension funds has removed a key pillar of demand for long- and ultra-long JGBs. While foreign investors have partially filled this gap, the market remains cautious.

A Test of Demand and the Outlook for Yields

The next major test for the market comes on Thursday, with Japan set to auction approximately ¥700 billion ($4.5 billion) of 30-year bonds. In response to weaker interest, the country has already been reducing its issuance of longer-maturity debt.

Looking ahead, Rochester sees the potential for the 10-year JGB yield to reach 3% by the end of the year. He attributes this forecast to several factors:

• The Bank of Japan's neutral rate target range of 1% to 2.5%.

• Growing investor demand for higher term premiums on government debt.

• The country's ongoing economic recovery from decades of deflation.