Japanese Asset Managers Launch Bond Funds as Yields Hit Multi-Year Highs

A Decade-Long Drought Ends

For more than ten years, Japanese government bonds offered investors virtually nothing. The Bank of Japan's ultra-loose monetary policy kept yields pinned near zero, making JGBs a placeholder rather than an investment. That era is over. Thirty-year Japanese government bonds now yield close to 4 percent, surpassing Germany's equivalent 30-year paper at around 3.6 percent and trailing only U.S. Treasuries at 5.2 percent.

Mitsubishi UFJ Asset Management, Daiwa Asset Management, and Amova Asset Management have each launched or are preparing investment trusts that give ordinary Japanese savers direct exposure to these higher-yielding bonds. The funds themselves remain modest in size, none exceeding 3 billion yen, but their arrival signals a fundamental shift in a market that had been dominated by central bank purchases for over a decade.

Targeting Low-Coupon Paper

Mitsubishi UFJ Asset Management plans to open its fund in September, focusing on low-coupon bonds with 20-year maturities issued during the Bank of Japan's quantitative easing regime. Prices for these securities have dropped sharply as the central bank normalizes policy, pushing yields higher. Investors who buy at a discount and hold to maturity will receive the full face value, a bet on time rather than trading.

"Until recently, you would lose money holding JGBs," said Takayuki Yagi, an executive officer at Mitsubishi UFJ Asset Management. "But now if you have both JGBs and stocks, you can get textbook diversification."

Amova launched its 30-year JGB investment trust in November last year, targeting 4 percent annual returns. By the end of June, the fund held 554 million yen in assets, slower than anticipated. Takuya Kanazawa, a senior vice president at Amova, attributed the tepid uptake to investor concerns that yields might rise further, eroding bond prices.

Shorter Maturities Gain Traction

Not all asset managers are betting on the long end. Daiwa Asset Management introduced an investment trust in June focused on two-year JGBs, responding to a sharp rise in short-term yields. The two-year JGB yield reached 1.64 percent on Wednesday, a 31-year high, driven by expectations the Bank of Japan could raise interest rates as soon as September.

"This is going to be a competitive product against two-year fixed deposits," said Yasuaki Matsuba, senior managing director at Daiwa. "And this is good for those who cannot wait for 30 years for the bonds to mature."

Japan's yield curve is now the steepest among major economies, yet retail investors have had limited ways to capitalize on it. Retail JGBs, introduced by the government in 2003, come in maturities of three, five, and ten years, cannot be traded, and represent a small fraction of the overall market. SBI Securities has offered longer-dated JGBs, with maturities between 10 and 40 years, since 2021, but the segment remains niche.

A Matter of National Urgency

The push to attract retail buyers is not purely commercial. The Japanese government faces a pressing need to diversify its investor base as the Bank of Japan steps back from the bond market. The central bank is expected to reduce its JGB holdings by 48 trillion yen this fiscal year and continue at that pace, according to Takafumi Yamawaki, head of Japan rates research at JPMorgan Securities Japan.

At the same time, the government plans to increase JGB issuance by 15 trillion yen this year to fund a large-scale stimulus package and tax cuts. The gap between rising supply and shrinking central bank demand leaves a void that domestic and foreign investors will need to fill.

Retail participation could ease that transition, but the window is narrow. If yields continue to climb, bond prices will fall further, deepening losses for holders who bought earlier. If yields stabilize or decline, the current opportunity to lock in higher returns will close. Asset managers are betting that Japanese households, sitting on trillions of yen in low-yielding deposits, will see the trade-off as worthwhile.

What Comes Next

Japan's bond market is undergoing a structural reset. After years of central bank dominance, private investors are being asked to step in. The proliferation of retail-focused bond funds is one sign of that shift. Whether households respond in sufficient numbers will depend on their appetite for duration risk and their willingness to move cash out of bank deposits.

For now, the yield curve is steep, the government is issuing more debt, and the central bank is buying less. Fund managers see an opening, and they are moving quickly.