TOKYO, Sept 9 (Reuters) - A rise in Japanese bond yields may prompt domestic institutional investors to keep more of their money at home, Fitch Ratings said in a report on Wednesday.
The ratings agency said it expects Bank of Japan policy rates to rise faster than market consensus in 2026 and 2027, lending support to the yen and the relative appeal of domestic debt.
"As Japanese inflation, monetary policy and growth prospects lift domestic real rates, higher local yields will reduce the incentive for domestic institutions to chase lower-yielding foreign assets," Fitch analysts, led by head of markets research Monsur Hussain, said in the report.
The yield on the benchmark 10-year Japanese government bond hit 3% last week for the first time since September 1996, fuelled by investor concerns about inflation, fiscal health and mounting pressure for BOJ rate hikes. Markets have priced in a near certainty the central bank will raise its key rate to 1.25% at its meeting next week.
Global markets shuddered in July when Japan floated the possibility of a pivot by its $2 trillion Government Pension Investment Fund to domestic assets. There is no sign the GPIF is adjusting its portfolio yet, but signs are emerging that other Japanese institutional funds are reassessing opportunities at home.
Japan's megabanks are cautiously rebuilding their JGB holdings, while the nation's life insurers are selling existing lower-coupon bonds to reinvest in higher-coupon securities, according to the Fitch report.
"We do not expect a fire sale of JGBs even if yields across maturities continue to increase," the ratings company said.
($1 = 153.3000 yen)
Reporting by Rocky Swift; Editing by Kate Mayberry
Source: Reuters