Facing ultra-long-term Japanese government bond yields approaching the 4% threshold, Japan’s giant life insurance companies, which manage a staggering 386 trillion yen in assets, are collectively undergoing a massive repatriation...
Major Japanese life insurers are signaling a move to increase their allocation to domestic bonds again. Following the Bank of Japan’s reduction in bond purchases and yields on ultra-long-term government bonds rising to multi-year highs, traditional long-term funds are beginning to return to the Japanese bond market, which could ease demand pressures on government bond issuance over the coming months.
Japan Post Insurance plans to increase its purchases of yen-denominated bonds in the second half of the fiscal year; Daido Life has further raised its plan to increase domestic bond holdings, primarily focusing on corporate bonds; Meiji Yasuda Life intends to largely maintain its holdings of Japanese government bonds while selling lower-yielding bonds and replacing them with higher-yielding alternatives.
This shift is already reflected in trading data. According to the Japan Securities Dealers Association, life insurance institutions have consistently net-purchased ultra-long-term Japanese government bonds over the past four months. Stephen Spratt, strategist at Société Générale, believes that, given the reduced scale of ultra-long-term bond auctions, life insurers' willingness to invest in Japanese government bonds in the second half of the fiscal year may further increase.
20-year Treasury auction sets record, nearly 4% yield reattracts long-term capital
The clearest signal came from the 20-year Japanese government bond auction held on October 20. According to data from Japan’s Ministry of Finance, the bid-to-cover ratio for this auction reached 5.84, the highest level since the 20-year bond was introduced in 1987, significantly above the 4.01 ratio recorded in the September auction. The average yield at auction was 3.723%, with the lowest accepted bid corresponding to a yield of 3.729%.
The auction size was ¥700 billion, with total competitive bids reaching ¥3.139 trillion, and approximately ¥537.1 billion was accepted. The auction’s tail spread narrowed to just ¥0.07, indicating strong buyer competition.
Long-term Japanese government bond yields had been rising continuously due to global bond selling, inflationary pressures in Japan, and fiscal concerns, with 20- and 30-year yields一度 approaching multi-decade highs.
For life insurance, higher yields are beginning to alter the asset allocation logic.
Japanese life insurers hold large liabilities with multi-decade maturities, making long- and ultra-long-term government bonds naturally suitable for matching asset-liability durations. Prolonged periods of zero interest rates previously forced these institutions to increase allocations to foreign bonds, equities, and other higher-yielding assets; now, with long-term Japanese bond yields approaching 4%, domestic fixed-income assets have regained their appeal.
According to data from the Japanese Life Insurance Association, as of the end of July, the investment assets of Japan’s life insurance industry amounted to approximately ¥386 trillion, equivalent to about $2.4 trillion. Such a massive asset base means that even a small adjustment in allocation could significantly impact the government bond market.
Life insurance capital inflows coincide with the Bank of Japan reducing its role in the market.
The timing of the recovery in life insurance demand is particularly important. The Bank of Japan is gradually exiting its long-standing role as a major buyer of government bonds. As monetary policy normalizes, private investors must absorb a larger supply of government bonds.
Meanwhile, the Japanese government continues to face significant fiscal financing needs. The market is assessing whether the Takagi administration will introduce a second supplementary budget and the potential additional bond issuance resulting from the initial budget for fiscal year 2027.
The Bank of Japan’s interest rate path remains an important variable. The bank raised its policy rate to 1.25% in September, and the market generally expects a pause at the end-of-October meeting, but another rate hike in December is still possible.
If market expectations suggest that terminal rates will continue to rise, investors may choose to wait for higher yields rather than immediately making large-scale purchases of long-term bonds. This is also why life insurers' portfolio rebalancing does not imply that ultra-long-term yields have already peaked.
Homin Lee, Senior Macro Strategist at Lombard Odier, believes that supplemental budgets, the fiscal year 2027 budget, and Bank of Japan policy may still cause volatility, but the auction environment in the coming weeks could improve as the outlook for government bond supply becomes clearer and domestic demand stabilizes.
High yields are reversing the old logic of prioritizing overseas allocation.
For many years, one of the primary reasons Japanese institutional investors increased their allocations to overseas bonds was due to excessively low domestic yields. This logic is now beginning to shift.
The 20-year Japanese government bond yield has exceeded 3.7%, and the 30-year yield is also at around 4%, a historical high. For life insurance institutions requiring long-term, stable cash flows, purchasing Japanese bonds eliminates currency hedging costs while locking in nominal yields rarely seen over the past several decades.
The yen has recently remained relatively stable, reducing the urgency for institutions to rapidly shift assets overseas. Justin Heng, Asia rates strategist at HSBC, believes that higher absolute yields, a steeper yield curve, and recent exchange rate stability are all enhancing the appeal of Japanese government bonds to domestic investors.
Tuesday’s 20-year Japanese government bond auction has shown that some waiting capital is beginning to re-enter the market. Following a record-high bid multiplier for this tenor, the yield on 20-year JGBs briefly fell by approximately 4 to 6 basis points.
This does not mean that the structural pressures on Japanese government bonds have disappeared. Fiscal expansion, continued rate hikes by the Bank of Japan, and rising global long-term yields could all push Japanese bond yields higher again.
However, market supply and demand are undergoing significant changes: as the Bank of Japan gradually reduces its bond purchases, life insurance funds that were previously pushed overseas by low yields are once again recognizing the value of holding domestic bonds. For the Japanese government, which needs to continuously issue large amounts of long-term debt, whether this domestic long-term capital further flows back will become a key variable in pricing ultra-long-term Japanese government bonds in the next phase.