Pimco Sees Value in Japanese Bonds Despite Chaotic Yield Moves

Tokyo, June 4, 2025 — Pacific Investment Management Co. (Pimco), one of the world’s largest fixed-income investment managers, has expressed renewed confidence in Japanese government bonds (JGBs), asserting that recent market volatility offers a compelling entry point for long-term investors. This comes at a time when Japanese yields have experienced wild swings amid policy uncertainty, inflation pressures, and shifting global interest rate dynamics.

Turbulence in the Bond Market

Japanese bond markets have seen significant turbulence over recent months. Yields on 10-year JGBs surged past 1% in May — a level not seen since 2012 — as investors speculated about further normalization of the Bank of Japan’s (BoJ) ultra-loose monetary stance. The volatility intensified following Governor Kazuo Ueda's remarks hinting at gradual policy recalibration, leading to a spike in bond sell-offs.

However, the yield volatility hasn't deterred Pimco. In fact, the Newport Beach, California-based asset manager views the dislocations as an opportunity.

“We see attractive value in intermediate-to-long duration JGBs,” said Erin Browne, portfolio manager at Pimco. “The yield moves may seem disorderly, but they’re providing real returns for the first time in years. That’s something global investors shouldn’t ignore.”

Inflation and Policy Shift at the Core

Japan’s consumer inflation remains above the central bank’s 2% target, prompting speculation that the BoJ may exit its long-standing dovish stance faster than expected. After years of yield curve control (YCC) and negative interest rates, Japan is now at a turning point.

Still, despite the tightening signals, the BoJ has maintained a cautious tone. Governor Ueda reiterated in recent speeches that any policy shift will be "gradual and data-dependent," giving investors like Pimco time to reposition their portfolios.

“We expect the BoJ to remain accommodative compared to other central banks,” Browne added. “This creates a favorable environment for holding JGBs, especially given Japan’s structural deflation risks and demographic challenges.”

Market Context: A Global Bond Perspective

Globally, bond markets have repriced sharply since 2022 due to aggressive monetary tightening in the US and Europe. While US Treasuries and German bunds have become more attractive in real terms, Pimco believes JGBs now stand out due to the relative stability of Japan’s inflation and the credibility of its central bank communication.

The Japanese yen's depreciation, which has pushed it near multi-decade lows against the US dollar, also adds a layer of interest. For foreign investors, the weaker yen means better entry prices — though currency-hedged strategies may be necessary to mitigate volatility.

“Currency risk is non-trivial,” noted Yuki Masuda, a fixed-income strategist at Nomura Securities. “But with global hedging costs declining, more institutional players are looking back at JGBs, especially the 10- and 20-year segments.”

Investor Outlook: Opportunity in the Calm After the Storm

Pimco's move reflects a broader sentiment shift among institutional investors — from skepticism to cautious optimism about Japan's bond market. While near-term yields may remain volatile, the overall long-term case for JGBs is gaining traction.

“The big story here is normalization,” said Michael Townsend, senior economist at Global Macro Research. “For decades, Japan was considered an outlier in global bond markets. Now, with policy becoming more aligned to fundamentals, you’re seeing real price discovery come back.”

Pimco is reportedly increasing its allocation to JGBs within global aggregate strategies and is also offering Japanese investors exposure to their international fixed-income portfolios that include yen-hedged JGB components.

Risks Remain, but Pimco Stays Confident

Despite the bullish outlook, risks remain. A sharper-than-expected rise in inflation, sudden BoJ tightening, or an unexpected surge in US yields could undermine Pimco’s thesis. However, the firm is employing active duration management and currency hedging to mitigate downside risks.

“No market is without risk, especially during transitions,” said Browne. “But if you're a long-term investor who can tolerate some short-term volatility, JGBs offer both diversification and income potential.”

As global investors continue to search for yield and safety in an increasingly complex macroeconomic environment, Japan’s bond market — long dismissed as stagnant — is re-emerging as a viable and potentially lucrative destination.

Pimco’s renewed interest signals a possible inflection point, not just for Japanese bonds, but for the global perception of Japan’s economic trajectory. If yields stabilize and inflation stays under control, the world’s third-largest bond market may finally shed its reputation for lifeless returns.