Japanese Government Bonds (JGBs), BOJ Policy & Global Yield Spillovers
How Bank of Japan Yield Curve Control (YCC) exit and rising JGB yields impact the multi-trillion-dollar Japanese capital repatriation from US Treasuries and European bonds.
1. Japan as the World's Largest Creditor Nation
For over two decades, Japan's domestic negative-interest-rate policy (NIRP) and Yield Curve Control (YCC) forced Japanese institutional investors (Nippon Life, Norinchukin Bank, GPIF) to deploy trillions of dollars overseas, making Japan the largest foreign holder of U.S. Treasuries and European sovereign debt.
2. The Hedged Yield Arbitrage Breakdown
When investing in foreign debt, Japanese institutions must hedge currency exposure via 3-month FX forwards. The effective hedged yield for a Japanese investor is:
When the Fed raised rates above 5% while the BOJ remained near zero, the FX hedging cost surged to >5.5%, driving the FX-hedged return on U.S. Treasuries deeply negative for Japanese buyers.
3. The Repatriation Transmission Channel
As the Bank of Japan normalizes policy and lifts the 10-year JGB yield cap toward 1.00%–1.50%, domestic Japanese sovereign bonds become economically superior to FX-hedged foreign paper. This triggers a structural repatriation of capital back into JGBs, removing a key marginal buyer of U.S. 10Y and 30Y Treasuries and exerting upward pressure on global benchmark term premia.