Key facts
- 30-year Japanese government bond (JGB) yields surpassed 3% in May 2025, a level not seen in over two decades.
- The JGB yield curve steepened significantly, with the spread between 5-year and 30-year maturities exceeding 200 basis points.
- The Bank of Japan's monetary policy changes, including ending negative rates and yield curve control, have increased volatility.
- Major Japanese life insurers have reported substantial unrealized losses on their long-duration JGB portfolios.
- Pimco suggests that if 30-year JGB yields reach 3%, the firm may consider investing in them, viewing the market as 'dislocated'.
Major institutional investors are reassessing their strategies in Japan's bond market as yields climb. Tomoya Masanao, co-head of Pimco Japan, indicated that the firm might consider investing in long-term Japanese government bonds (JGBs) if their yields reach 3%, a level not seen in over two decades. This perspective comes as 30-year JGB yields surpassed this threshold in May 2025, accompanied by a significant steepening of the yield curve.
The shift in Japan's bond market follows the Bank of Japan's (BOJ) monetary policy normalization, which included ending its negative interest rate policy and yield curve control in March 2024. Since then, the BOJ has raised rates twice and begun quantitative tightening, leading to increased volatility in fixed income markets.
This volatility has impacted major Japanese life insurers, who have traditionally been significant buyers of long-term JGBs. Companies like Meiji Yasuda Life and Nippon Life Insurance have reported substantial unrealized losses on their JGB portfolios due to rising interest rates. Meiji Yasuda disclosed approximately ¥1.386 trillion (US$9.7 billion) in unrealized losses for the fiscal year ending March 2025, a sharp increase from the previous year. Nippon Life reported about ¥3.6 trillion (US$25 billion) in unrealized losses, in addition to realizing ¥500 billion through bond disposals.
Pimco suggests that technical dynamics, including the BOJ's dominance in the short-duration segment, have made the long end of the yield curve a focal point for interest rate volatility. The firm proposed that Japan's Ministry of Finance could improve market balance through more flexible debt issuance, and continued quantitative tightening by the BOJ could help restore supply-demand equilibrium. Pimco also noted parallels with rising yields in the US and Germany, driven by fiscal developments, and anticipates modest fiscal stimulus in Japan due to trade frictions and regional security challenges.