Japan Pulled $106 Billion From Treasuries in Three Months

Yields moved.

I saw it on my screen last week. The 10-year looked different. I didn't do anything. Nobody in Congress did anything.

The move started 6,000 miles away, in Tokyo.

Japan's 30-year government bond yield hit a record 4.27% this month. Less than two years ago it sat below 2.3%.

Japanese banks and insurers bought ¥5.4 trillion ($34 billion) of domestic government bonds from April through August. That is the largest five-month total since early 2023.

At the same time, they sold foreign bonds. ¥2.5 trillion in September alone. Year-to-date bank selling of foreign bonds is the largest for that stretch since 2005.

Japan holds $1.1 trillion in US Treasuries. More than any other country. But those holdings dropped from $1.21 trillion in April to $1.104 trillion in July: $106 billion pulled in three months.

The Bank of Japan raised its policy rate to 1.25% on September 18, the highest since 1995.

HSBC estimates Japanese banks sold about $70 billion of foreign bonds this year, compared with purchases of $35 billion last year.

The trade that sent Japanese capital to America for a generation is reversing.

The largest foreign holder of US Treasuries is selling. And the slow money hasn't moved yet.

When Japanese institutions started buying foreign bonds decades ago, the math was simple. Borrow cheap at home. Earn more abroad. That math broke this year.

The Bank of Japan raised its policy rate to 1.25% on September 18, the highest since 1995. The 10-year JGB hit 3.055% on September 24, a 30-year high.

The US-Japan 10-year yield spread narrowed from 3.98 percentage points in October 2023 to about 2.0 points by September 2026. The gap that made the trade profitable shrank by half.

At the current rate gap, a dollar-yen carry trade earns about 0.22% a month. One 2.38% yen rally erases 331 days of carry. That's the kind of math that keeps risk managers awake.

The arithmetic no longer works. And institutions are acting on it.

"A hedged Treasury position now pays a Japanese investor less than domestic bonds."

— Deutsche Bank's Shoki Omori

And here's where it spreads.

Japan's life insurers manage about $2.5 trillion in assets. About a quarter sits overseas.

They have been net sellers of foreign bonds for six consecutive fiscal years, since FY2020. That trend started before yields at home offered any competition. Now they do.

Nippon Life, Meiji Yasuda, and Daiichi Life are announcing FY26 investment plans this week. Markets are watching whether they shift more money into domestic bonds.

Deutsche Bank's Omori says insurers may step up purchases of 30-year JGBs as yields hold around 4%.

Finance Minister Satsuki Katayama called on pension funds, including the GPIF, to invest "substantially" more in Japanese financial assets. The GPIF manages $1.8 trillion. Société Générale estimates it could buy up to ¥12.3 trillion ($76 billion) of additional JGBs without changing its target allocation.

Meanwhile, one Japanese institution already ran this experiment.

Norinchukin Bank is Japan's largest agricultural lender. It held about half its ¥45 trillion portfolio in foreign government bonds.

It bet that US and European rates would fall. They rose instead.

Norinchukin reported a loss of ¥1.8 trillion ($12.6 billion) for the fiscal year ending March 2025. It sold ¥12.8 trillion of foreign bonds in nine months.

Its new CEO, Taro Kitabayashi, now calls JGBs an investment target. The same bonds the rest of the industry is buying.

"Japanese government bonds are now within range as an investment target."

— Norinchukin CEO Taro Kitabayashi

Three more things worth keeping track of.

Brent crude sits near $110 a barrel, up about 80% year-to-date. Japan imports almost all its oil. Higher energy costs feed Japanese inflation, which gives the BOJ more reason to keep raising rates. Every $10 on crude tightens the same screw we described above.

CFTC data shows speculative positioning in the yen flipped from a deep net short to the largest net long since July 2025, at $9.7 billion, in the first two weeks of September. Fast money already turned. The question is whether the slow money follows.

At the October 6 auction, the new 10-year JGB carried a 3.1% coupon, the first 3%-plus coupon in three decades. The bid-to-cover ratio came in at 3.76, above the 12-month average of 3.21. Domestic investors bought ¥21.7 trillion of coupon-bearing JGBs from April through August, 89% of last fiscal year's full total in five months. We'll see.

In 1985, Japan was the world's largest exporter of capital to American markets.

Japanese investors held about one-third of the foreign-held US national debt.

On September 22, 1985, finance ministers from five countries met at the Plaza Hotel in New York. They agreed to push the dollar down.

The dollar fell from ¥240 to ¥150 by early 1987. A 37.5% decline in 16 months.

Japanese investors watched their dollar assets lose value in yen terms. They brought money home. The yen kept rising.

"We think yen strength will happen slowly, then quickly."

— Matt Smith, Ruffer

On October 19, 1987, the Dow fell 22.6% in a single day. Black Monday. The flow of Japanese capital leaving American markets contributed to the conditions that made the crash possible.

Today, Japan holds $1.1 trillion in US Treasuries. More than any other country.

Yields at home are the highest in 30 years. Hedging costs erode the yield advantage. The government is asking capital to come home.

In 1985, the trigger was a coordinated decision to push the dollar down. Today the triggers are domestic: rising yields and a rising yen. Both at once.

The exit started. It has no schedule. We'll see.