Japan Credit Risk Hits Four-Year High as Global Funds Turn Bullish on JGBs

Japan's sovereign credit risk jumped by the most since 2022 in the week ending October 28, pressuring the country's government bond market even as global fund managers grew more bullish on Japanese government bonds, creating a striking divergence in sentiment. The spike in credit default swap spreads reflects deepening concern about Japan's fiscal trajectory and debt sustainability at a moment when yields have already climbed toward multi-decade highs.

Despite that backdrop, international investors are increasingly positioning for gains in Japanese government bonds, betting that current yield levels offer compelling value, particularly as hedging costs make foreign alternatives less attractive by comparison. That bullish tilt from global funds stands in tension with the credit risk signal, pointing to a market divided over whether rising yields represent an opportunity or a warning.

The latest security flow data for the week ending October 23 showed foreign investors bought a net 43.3 billion yen of Japanese bonds, sharply down from 1,454.2 billion yen the prior week, suggesting overseas demand remains uneven despite the broader bullish turn in sentiment. Japanese investors, meanwhile, reduced their net selling of foreign bonds to 92.6 billion yen from 161.6 billion yen, while accelerating purchases of foreign equities to 288.1 billion yen from 128.3 billion yen. Foreign buying of Japanese stocks surged to 1,180.9 billion yen from a net sale of 66.5 billion yen the previous week, pointing to renewed overseas appetite for Japanese risk assets more broadly.