Indications are increasing of a major shift in the movement of Japanese capital, with local bond yields rising and the yen rising to its highest levels in seven months, in a development that may prompt Japanese institutions to keep more of their money inside the country, and reduce demand for foreign assets after decades of searching for returns abroad.
Fitch Ratings Agency said on Wednesday that the rise in Japanese bond yields may encourage local institutional investors to reevaluate their foreign investments, especially with its expectation that the Bank of Japan will raise interest rates at a faster pace than market estimates during the years 2026 and 2027.
Fitch analysts, led by Head of Market Research Mansoor Hussein, believe that rising domestic real interest rates, supported by inflation and monetary policy growth prospects, will reduce the incentive for Japanese institutions to search for returns in foreign assets.
This shift was strengthened after the ten-year Japanese government bond yield touched the 3 percent level last week for the first time since September 1996, amid concerns about inflation and the financial situation and increasing pressure on the Bank of Japan to continue tightening monetary policy.
Markets are currently pricing in the almost certain possibility that the bank will raise the key interest rate by 25 basis points to 1.25 percent during its meeting on September 17 and 18, which will increase the attractiveness of domestic debt instruments compared to what it was during the years of very low interest rates.
There are already signs that the behavior of financial institutions is changing. Fitch said that major Japanese banks are cautiously rebuilding their holdings of government bonds, while life insurance companies are selling old bonds with low coupons to reinvest the money in new papers with higher returns.
The agency does not expect a broad sell-off in government bonds even if yields continue to rise across various maturities, indicating that institutions may see the new levels as an opportunity to rebuild their local portfolios rather than exit them.
Global markets showed sensitivity to this possibility in July, when the possibility of redirecting a larger portion of its assets toward the domestic market was raised. There are no indications yet that the Fund has modified its portfolio, but the actions of other institutions suggest that the re-evaluation process has begun.
The rise in yields coincides with a strong shift in the currency market. The yen has risen about 4 percent since the beginning of September, and on Wednesday it reached 153.32 yen to the dollar, approaching the highest level in seven months at 152.89 recorded in the previous session.
The gains of the Japanese currency were not limited to the dollar, but extended against the euro and the British pound, as well as against currencies that are common destinations for “carry trade” transactions, such as the Mexican peso and the Turkish lira.
This puts additional pressure on the interest trade based on borrowing the yen at a low cost to buy currencies and assets with higher yields. The rise in Japanese interest rates and the rise of the yen together reduce the feasibility of this strategy, and increase the possibility of returning funds to Japan.
The currency is also receiving support from expectations of the Bank of Japan accelerating monetary tightening, and the possibility of Japanese investors returning part of their foreign funds, in addition to American pressure towards a stronger yen.
US Treasury Secretary Scott Besent said that traders who bet against the yen should be aware of the ability of Washington and Tokyo to act, after the joint US-Japanese intervention in late July to support the currency. His statements come at a time when Washington is also seeking to avoid Japan being forced to sell US Treasury bonds to finance its interventions in the exchange market.
The yen's path remains linked to what Bank of Japan Governor Kazuo Ueda will say after the upcoming interest rate decision. Rate hikes have become largely absorbed into prices, so investors will be looking for signs of the speed of the next hikes.
The importance of the Japanese shift extends beyond the yen market. Japan is a huge exporter of global capital, and any sustained rise in domestic yields could make holding money at home more attractive, and dampen flows into foreign bonds and stocks.
Thus, the next Bank of Japan meeting will not only determine the direction of interest rates and the yen, but may also constitute an important milestone in the redistribution of Japanese capital globally. The more attractive domestic bonds become and the currency appreciates, the more likely it is that money will return to Japan, which could force a gradual repricing in global asset markets.
The pace of inflation accelerated in China during August, driven by rising costs of energy and raw materials, with continued supply risks resulting from the conflict in the Middle East, but weak domestic demand kept underlying price pressures limited, in an equation that increases the complexities of managing the second largest economy in the world.
Data from the National Bureau of Statistics showed that the producer price index rose 3.8 percent year-on-year, compared to 3.5 percent in July, exceeding Reuters poll expectations of 3.6 percent.
Consumer price inflation also accelerated to 0.8 percent from 0.5 percent, in line with expectations.
Dong Lijuan, a statistician at the bureau, said that the rise in global prices for crude oil and non-ferrous metals has led to an increase in prices in Chinese related industries. The impact was evident in the prices of smelting and processing non-ferrous metals, which jumped 20.8 percent year-on-year, while the prices of oil, coal and fuel processing rose 11.1 percent, and the prices of oil and gas extraction rose 10.5 percent.
The acceleration in energy inflation contributed about 0.28 percentage points to the annual increase in the CPI. This suggests that the bulk of current inflationary pressures are coming from the supply side and external costs, rather than from a strong recovery in consumption. Core inflation, which excludes food and energy, rose to just 1 percent, compared to 0.9 percent in July.
Nguyen Hoang Nam, an economist at Capital Economics, believes that the continuation of the conflict in the Middle East may keep inflation high for a longer period than previous estimates, but he expects consumer inflation to decline sharply next year, to record an average of 0.4 percent, with producer prices returning to deflation.
On a monthly basis, consumer prices rose 0.4 percent, exceeding expectations for a 0.3 percent increase, after falling 0.1 percent in July. Prices of fresh vegetables jumped 5.5 percent as a result of heat, heavy rain, and seasonal disruptions in supplies.
Cost pressures are not limited to energy; A shortage of memory chips linked to the surge in demand for artificial intelligence has pushed up costs in some industries. However, internal demand indicators remain weak, while consumption support programs have not yet succeeded in triggering a broad-based recovery. This is evident in the return to decline in home appliance prices, reflecting the declining impact of government replacement and support programmes. Ding Ming, chief economist at China CITIC Bank International, said that the continuation of core inflation at low levels means that price pressures will likely remain under control during the rest of the year, and that a sustained rise in inflation requires a stronger recovery in domestic demand.
Beijing is trying to address this weakness by expanding loan interest support for consumers and small private companies, with the Ministry of Finance ready to provide additional support if circumstances require it.
The authorities also took measures to support the real estate market, including extending the maximum limit on personal mortgage loans to 40 years.
Thus, China faces a clear economic paradox: imported inflation driven by energy and raw materials, versus domestic demand that is still unable to generate strong price pressures.
The course of the conflict in the Middle East and oil prices on the one hand, and the strength of the recovery in Chinese consumption on the other hand, will determine whether the current wave of inflation will continue until the end of the year, or remain limited and temporary.
The research arm of the China Petroleum and Chemical Corporation (Sinopec) expected that demand for oil in China would decline by 600,000 barrels per day in 2026, or the equivalent of 8.9 percent compared to last year, marking the third consecutive annual decline in light of the rise in oil prices, which led to curbing consumption and accelerating the pace of demand for electric vehicles.
The decline in demand for oil, or the long-term decline in consumption, in the largest oil importing country in the world was a major factor in reducing China’s imports of crude and curbing the further rise in global oil prices, despite the severe disruptions in supplies through the Strait of Hormuz due to the Iran war.
Gasoline and diesel are expected to lead the decline in consumption in China by 8.7 percent and 11.4 percent, reaching 149 million tons and 164 million tons, respectively.
On the other hand, the Sinopec Institute for Economic Research and Development stated in a report that the demand for aviation fuel may rise 1.3 percent on an annual basis to reach 41.55 million tons in 2026.
The report added that while China's refining capacity is expected to rise to 952 million tons annually in 2026, the quantities of processed crude oil declined to 697 million tons between the second and third quarters.
