Japan Bonds: The Unowned Asset Poised for a Rally

Japanese government bond yields have experienced significant increases, with the 10-year JGB yield reaching 2.901% recently and currently trading at 2.781%. This marks a rise of over 70 basis points since the start of the year. The Bank of Japan's yield curve control program, which had targeted the 10-year yield around zero, was ended in March 2024 as part of a broader monetary policy normalization effort.

Charles Gave, co-founder of Gavekal, argues that Japanese bonds, especially long-dated ones, are currently undervalued and represent a highly attractive market. He recommends investors consider a balanced portfolio including Japanese bonds, and suggests replacing Euro, US bonds, and gold with long-dated Japanese debt. Gave predicts falling yields and a rising yen, potentially making these bonds outperform gold.

However, differing views exist. Henning Potstada of DWS notes that European bonds may be more attractive due to the European Central Bank's higher policy rate of 2.25% compared to the Bank of Japan's 1%. He also highlights Japan's debt-to-GDP ratio exceeding 200%, a greater concern than the EU's 81.7%, suggesting Europe offers more stability for investors.