Japanese bond funds see record inflows as rising yields attract global investors

Japanese government bonds are becoming harder for global investors to ignore. Record inflows into Japanese bond funds this year show that foreign investors, particularly in Europe, are increasingly willing to look beyond the traditional US fixed-income market as rising Japanese yields create a more attractive investment opportunity.

Japanese bond exchange-traded funds have attracted $1.5 billion in net inflows so far this year, according to Morningstar data released on Tuesday. That is nearly three times the $550 million collected during the whole of 2025.

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The interest reflects a broader shift in how investors view Japanese government bonds. For years, Japan's ultra-low interest rates and the Bank of Japan's huge bond purchases kept yields close to zero, making JGBs difficult to justify as a source of income. That picture has changed as inflation has returned and the central bank has started raising rates.

The 10-year JGB yield climbed to 2.93% earlier this month, its highest level since the mid-1990s, from 2.1% at the start of the year. It was just 0.1% at the start of 2022.

The rise in yields has pushed bond prices lower, but it has also given foreign investors something Japan's debt market has lacked for years: meaningful income.

BlackRock said its Europe-domiciled Japanese government bond ETFs had attracted $1.4 billion in inflows this year, driven mainly by large wealth investors. Those funds recorded a $58 million outflow in 2025.

BNY, the world's largest custodian bank, also found that non-Japanese accounts had invested $4.7 billion in JGBs this year. Foreign buying accelerated in July, with net inflows of $2.8 billion, the strongest monthly figure in more than a year.

For European investors, Japanese bonds can offer another advantage. Once currency exposure is hedged, the returns can become more appealing because of the interest-rate differences between Japan and markets such as the US and Europe.

Also read: Japanese businesses turn to currency hedging as weak Yen drives up import costs

That has encouraged a wider range of foreign investors to consider JGBs, including insurance companies, government institutions and central banks.

But the rush into Japanese bonds is far from a universal bet on rising prices.

The JGB market is worth roughly $8 trillion, meaning this year's foreign inflows remain small relative to its overall size. Investors are also aware that the same forces that have made Japanese bonds more attractive could push yields even higher.

Vanguard's Ales Koutny, for example, remains positioned for higher yields in shorter-dated JGBs, expecting the Bank of Japan may need to raise rates relatively sharply. At the longer end, however, yields above 4% on 30-year bonds are beginning to look more compelling.

Pictet Wealth Management remains underweight on Japanese government bonds because of concerns over further increases in yields. Still, it could raise that position if the yen stabilises and markets begin pricing in more Bank of Japan rate hikes.

The central bank's next meeting in September will therefore be closely watched. A widely expected rate increase could further reshape the Japanese bond market, testing whether the recent foreign buying marks the beginning of a sustained shift or simply reflects investors taking advantage of yields that have risen sharply.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)