Pacific Investment Management Co (PIMCO) has highlighted a significant shift in Japan’s bond market, urging global institutional investors to reconsider their duration strategies.
In a recent commentary, the firm observed that 30-year Japanese government bond (JGB) yields rose above 3% in May 2025 – levels last seen more than two decades ago – while the curve between 5-year and 30-year maturities reached over 200 basis points, outpacing curves in other major markets.
This repricing follows key monetary policy changes by the Bank of Japan (BOJ), which ended its negative interest rate policy and yield curve control framework in March 2024.
Since then, the BOJ has raised interest rates twice and started reducing its balance sheet, introducing increased volatility in the fixed income market.
The bond market transformation is reflected in the changing behaviour of Japan’s major life insurers, who have traditionally been large buyers of long-term JGBs.
Rising yields have altered their investment postures, with some now acting as net sellers after addressing their asset-liability duration gaps.
Meiji Yasuda Life Insurance disclosed unrealised losses totalling approximately ¥1.386 trillion (US$9.7 billion) on its JGB portfolio for the fiscal year ending March 2025, a sharp increase from ¥161.4 billion the prior year.
Nippon Life Insurance reported about ¥3.6 trillion (US$25 billion) in unrealised losses, in addition to realising ¥500 billion in losses through bond disposals.
These losses are primarily linked to long-duration JGBs, whose market values have declined due to the rise in domestic interest rates.
According to PIMCO, technical dynamics in the JGB market are playing a major role in recent price fluctuations.
The firm emphasised that the long end of the yield curve has become the focal point for interest rate volatility, due in part to the BOJ’s dominance in the short-duration segment.
The central bank holds more than 50% of outstanding JGBs maturing in under 10 years, and over 90% of certain shorter issues.
PIMCO suggested that Japan’s Ministry of Finance could mitigate imbalances through more frequent and flexible debt issuance, aligning its practices more closely with international standards. Additionally, continued quantitative tightening by the BOJ could gradually return supply-demand equilibrium across the yield curve.
PIMCO noted that Japan’s situation is not isolated. Yield curves in the US and Germany have also steepened in response to fiscal developments, including defence and tax policies. In Japan, modest fiscal stimulus is expected as a response to trade frictions and regional security challenges.
For institutional investors in Asia and beyond, the implications are significant. With Japan’s gross government debt still above 230% of GDP, market participants are closely monitoring how bond supply strategies and central bank actions affect yield dynamics and credit perception.
In contrast to the pre-pandemic years of ultra-low or negative yields, the current environment presents insurers with more diversified options across global fixed income.
PIMCO argued that Japanese bonds, particularly at the long end, may now offer competitive returns for investors hedging currency exposure.
Asian insurers and asset managers may need to reevaluate their fixed income allocations in light of the shifting dynamics in Japan.
While higher volatility remains a consideration, the potential for yield enhancement and strategic diversification is becoming more prominent in long-dated Japanese sovereign debt.
