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As per the best data I can find online, Japanese 10yo bonds have a yield of less than 1%, which is lower than yields for US and German bonds. Additionally the yen is experiencing rapid inflation at the moment which makes the bond particularly unattractive.

So who is buying these bonds? Or perhaps no one is buying them and the Japanese government is just printing money to cover their deficit?

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  • May be more of an Economics question than personal finance.
    – nobody
    Commented Sep 28, 2023 at 13:05

1 Answer 1

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My summary of the reasons, as per a similar Quora question:

  1. Important context: The Bank of Japan's aggressive QE policy ensures that there is a constant buyer for these bonds. The central bank’s actions prop up bond prices, mitigating the risk of holding negative-yield debt. The Bank of Japan's "Yield Curve Control" program maintains the 10-year yields around zero, making it unlikely for rates to rise.

  2. Low-Risk Carry Trade: The cost of financing the purchase of these bonds can be less than the coupon, enabling a low-risk carry trade. Essentially, you buy the bond and sell it back to the Bank of Japan, profiting from the yield differential.

  3. Regulatory Requirements: Japanese institutions are often required to hold a certain percentage of their portfolios in safe, government-backed securities like JGBs (Japanese Government Bonds). This may not be feasible with U.S. bonds due to currency risk and regulatory limitations.

  4. Currency Risk: The fluctuating USD/JPY exchange rate makes the carry trade between U.S. and Japanese bonds a high-risk, low-reward proposition. Currency volatility can wipe out gains from yield differentials.

  5. Investment Policy Constraints: Institutions like pension funds or insurance companies have mandates that could require them to hold domestic bonds, irrespective of yields.

  6. Market Speculation: Some investors anticipate that yields could go even lower, driving up bond prices. This expectation of capital gain could motivate them to hold negative yielding bonds.

  7. Hedging & Portfolio Balance: These bonds offer a safe and liquid debt instrument and can serve as a hedge against market uncertainties or deflationary pressures.

  8. Potential for Currency Appreciation: Investors may speculate that the JPY will appreciate relative to other currencies, which would increase the real value of the bond's return.

So the answer is that this is mostly happening due to legislation passed by the Japanese government, as well as some risk hedging by private actors.

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