Who Will Buy Japanese Government Bonds?
A recent NLI Research Institute report examines the shifting landscape of Japanese Government Bond (JGB) ownership as the Bank of Japan reduces its massive holdings. With long-term interest rates rising due to monetary policy normalization and fiscal expansion, the analysis highlights a growing need for private investors to fill the resulting vacuum. While banks and foreign investors have increased their positions, the author argues that these groups can be volatile or sensitive to short-term earnings. Consequently, the paper emphasizes the importance of household investment in JGBs as a stabilizing force for the market. To encourage this, the source suggests improving the attractiveness of bond products, such as adjusting interest rate formulas or introducing longer-term options. Ultimately, mobilizing individual savings is presented as a vital strategy for ensuring the steady absorption of national debt.
1. A Paradigm Shift in the JGB Market
After a decade under the absolute dominance of the Bank of Japan's (BoJ) large-scale asset purchases, the Japanese Government Bond (JGB) market is undergoing a structural paradigm shift, moving from a centrally-managed market to one dictated by genuine price discovery. This new era is defined by rising long-term interest rates and the central bank's strategic, methodical withdrawal as the buyer of last resort, creating profound implications for the stable financing of Japan's sovereign debt.
The core objective of this analysis is to dissect the evolving landscape of JGB ownership and assess the strategic imperatives for ensuring the stable absorption of future debt issuance. This report argues that while institutional and foreign buyers provide a temporary solution, long-term fiscal stability is contingent on a strategic and urgent mobilization of Japan's JPY 2,286 trillion household asset pool—a goal currently undermined by flawed product design. This new environment forces a critical question to the forefront of fiscal policy: as the central bank retreats, "Who will buy Japan's debt?"
2. The Bank of Japan's Strategic Retreat and Its Market Impact
Since 2013, the Bank of Japan has served as the anchor of the JGB market, absorbing a colossal volume of government debt and suppressing natural price discovery. The central bank's recent policy shift, marked by a deliberate reduction in its JGB purchases, represents a fundamental turning point. This strategic retreat is progressively restoring market function but is also creating a significant demand vacuum that must be filled by other investors.
2.1. Quantifying the BoJ's Diminishing Footprint
The scale of the BoJ's presence and its subsequent withdrawal is striking. The central bank's ownership ratio of JGBs peaked at 53.9% in September 2023. Since then, a clear downward trend has emerged, with its holding ratio declining to 50.0% by September 2025. This reduction is the direct result of a deliberate policy of phased reductions in its monthly long-term JGB purchases, a process that commenced in August 2024.
2.2. The Emergence of a Structural Demand Gap
The combined effect of new government debt issuance and the BoJ's reduced holdings has created a structural vacuum that the market was forced to fill. An analysis of capital flows over the five quarters from Q3 2024 to Q3 2025 reveals the magnitude of this gap. During this period, the government's net issuance of bonds totaled approximately JPY 35 trillion. Simultaneously, the Bank of Japan reduced its own holdings by JPY 26 trillion. Together, these factors created a total demand requirement of approximately JPY 62 trillion that had to be absorbed by other market participants. This structural shift necessitates a deeper examination of which investor classes have stepped forward to fill this void.
3. The New Constellation of JGB Buyers: An Assessment of Stability
While the market has thus far absorbed the BoJ's retreat without incident, the composition of the new buyer base reveals underlying vulnerabilities. A breakdown of the JPY 62 trillion demand gap filled between Q3 2024 and Q3 2025 shows a heavy reliance on a few key players whose long-term commitment to the market remains uncertain.
3.1. The Primary Absorbers: Depository Institutions and Public Pensions
Domestic depository institutions have emerged as the single largest buyers, absorbing JPY 22 trillion of the demand gap. Their capacity to increase holdings is substantial, as they significantly reduced their portfolios during the peak of extraordinary monetary easing, leaving them with considerable room to rebuild their allocations. Following them were Public Pension funds, which increased their holdings by a significant JPY 8 trillion, providing a relatively stable, long-duration source of demand.
3.2. Overseas Investors: A Source of Scale and Volatility
Overseas investors played a critical role by absorbing JPY 14 trillion. While their immense capital capacity is indispensable, an over-reliance on this investor class introduces a permanent element of fragility. Foreign investors, excluding some central banks, are often driven by short-term arbitrage and global risk sentiment. This reliance on "hot money" makes the JGB market susceptible to external shocks, as these players can rapidly transform from buyers into aggressive sellers.
The potential volatility associated with institutional and foreign capital highlights the strategic imperative of cultivating a more stable, long-term domestic investor base to anchor the JGB market.
4. The Untapped Potential of the Japanese Household Sector
Japan's household sector represents a vast and critically underexploited resource for stabilizing the JGB market. With financial assets dwarfing those of other investor classes, households are strategically positioned to become a long-term, stable anchor for government debt, mitigating the risks associated with more volatile capital flows.
4.1. The Scale of Household Financial Assets
As of September 2025, Japanese households held a staggering JPY 2,286 trillion in financial assets. The composition of these assets reveals a profound opportunity:
- Cash and Deposits: A remarkable 49.1% of these assets are held in cash and low-yielding deposits.
- JGB Holdings: In stark contrast, direct holdings of JGBs account for a minuscule 0.8%.
To put this in perspective, a mere one percentage point shift from cash and deposits into JGBs would inject over JPY 22 trillion of stable, long-term capital into the market—enough to absorb more than a third of the annual demand gap identified in this analysis.
4.2. The Case for Households as a Stabilizing Force
Households are uniquely positioned to act as stable, long-term investors. Unlike financial institutions, they are not subject to the pressures of quarterly earnings reports or capital adequacy regulations, allowing them to adopt a longer investment horizon. This thesis is supported by survey data revealing that 46.1% of households "have no intention of holding" financial products with a risk of principal loss. This deep-seated aversion to principal loss, combined with trillions in low-yield deposits, creates a captive market for a well-designed, state-guaranteed savings instrument. The Personal JGB is theoretically the ideal product to bridge this gap, yet its potential remains tragically unrealized.
5. Evaluating Personal JGBs as a Catalyst for Household Investment
While Personal JGBs are the primary vehicle for channeling household savings into government debt, their effectiveness hinges on a product design that remains competitive and aligned with investor preferences in a rising-rate environment.
5.1. Product Characteristics and Recent Sales Trends
Personal JGBs offer several compelling strengths that have driven a recent surge in popularity as interest rates have normalized.
- Key Strengths: They offer a government guarantee on principal, provide interest rates significantly higher than comparable bank deposits, and can be redeemed at any time after the first year.
- Sales Trends: Reflecting these advantages, total sales of Personal JGBs have shown a clear upward trend since 2024, directly fueled by rising market interest rates.
5.2. A Self-Inflicted Wound: The Flawed Design of the Floating 10-Year Bond
Despite rising total sales, a deeper analysis reveals a significant and problematic shift in the product mix. Sales of the traditionally dominant Floating 10-year bond have plummeted, while demand has surged for Fixed 3-year and 5-year bonds. The root cause is the Floating 10-year bond's uncompetitive interest rate formula, which calculates its yield as the Market Yield x 0.66.
This 34% discount to the market yield creates an increasingly large and unfavorable gap as interest rates rise, now standing at approximately 0.7%. This flawed design is a critical policy failure; it effectively penalizes savers in a rising-rate environment—the very scenario where a floating-rate instrument should be most attractive. It actively discourages the exact long-term domestic capital the government desperately needs to attract.
6. Strategic Recommendations to Enhance JGB Market Stability
To fortify the domestic buyer base for government debt, a series of actionable policy interventions are required to enhance the appeal of Personal JGBs and attract a greater share of household assets.
- Enhance Product Competitiveness: The immediate and most crucial intervention is to recalibrate the Floating 10-year's interest rate formula. Raising the multiplier from the current 0.66 to a more competitive level, such as 0.8, would significantly narrow the gap with market yields and immediately restore its attractiveness to investors.
- Expand the Product Portfolio: Increasing investor choice can broaden the appeal of Personal JGBs. The current lineup could be expanded to fill existing gaps with the introduction of new types, such as a Floating 5-year or a Fixed 10-year bond, providing households with a more comprehensive suite of options.
- Introduce Longer-Maturity Options: A long-duration product, such as a 30-year bond, would be highly attractive to long-term savers. Given that 30-year JGB yields are substantially higher than 10-year yields, a 30-year product, even with the existing 0.66 multiplier, could offer a nominal yield of over 2%. To overcome investor objections that "30 years is too long to hold," the product must be designed to be redeemable after a few years in exchange for a portion of accrued interest.
- Consider Fiscal Incentives: A powerful, albeit politically difficult, option would be making Personal JGBs eligible for the NISA tax-free savings program. Eliminating the 20.315% tax on interest would dramatically boost their appeal. However, this proposal faces a high political hurdle, as it would attract criticism of being a self-serving policy ("我田引水") and create a perception of unfairness (不公平感) relative to other principal-protected products like bank deposits and corporate bonds.
These recommendations represent a multi-pronged strategy to transform Personal JGBs into a powerful tool for market stabilization.
7. Conclusion: Securing a Stable Domestic Anchor for Japan's Debt
The Japanese Government Bond market is navigating a structural transformation of historic proportions. The methodical withdrawal of the Bank of Japan has created a new reality that demands a sustainable and reliable new source of demand to ensure the stable financing of government debt. While depository institutions and foreign investors have filled the immediate void, over-reliance on them invites volatility. The strategic imperative is clear: Japan must cultivate its household sector as the stable, domestic anchor for the JGB market.
The stability of the JPY and Japan's ability to finance its future now rests on the government's willingness to compete for its own citizens' savings. Rectifying the technical flaws in Personal JGBs is not a minor product adjustment; it is a central pillar of sovereign debt strategy for the post-quantitative easing era.
Norbert Gehrke
