The yield on Japan’s 10-year government bonds has temporarily exceeded 3%.
Furthermore, the Bank of Japan has raised its policy interest rate to 1.25%. I feel that a full-scale “world with interest rates” has finally returned to Japan.
Until now, it was almost impossible to earn interest from deposits or government bonds in Japan. Therefore, to grow assets and earn income, it was necessary to hold risk assets such as stocks and real estate.
However, if it becomes possible to earn a yield of around 2-3% from Japanese government bonds, the premise of investing will change.
I am not considering selling all my Japanese stocks or moving all my funds solely into Japanese government bonds in the future.
My strategy is to combine receiving reliable interest from yen-denominated government bonds while maintaining the dividends and growth potential of Japanese stocks.
A 3% yield on Japanese government bonds is a major change
A 3% yield on Japan’s 10-year government bonds may look low compared to the 5% yield on U.S. Treasury bonds.
However, Japanese government bonds carry no currency risk.
For those who live in Japan and will continue to use yen in the future, the significance of earning a 2-3% yield in yen is substantial.
Even if you earn 5% interest on U.S. Treasury bonds, if the yen strengthens, you will incur foreign exchange losses. If you add a currency hedge, the cost will reduce the yield.
In contrast, with Japanese government bonds, you do not need to worry about yen appreciation or depreciation, and you can receive interest and principal in yen.
From now on, you will be able to secure a certain level of income by holding yen-denominated government bonds without having to force your funds into stocks or foreign currency-denominated bonds.
However, this does not mean that government bonds for individuals will yield 3%
Caution is required here.
Even if the yield on 10-year government bonds traded in the market reaches 3%, the interest rate on government bonds for individuals will not automatically become 3%.
For the September 2026 offering,
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Government Bonds for Individuals (Floating 10-Year): 1.95% per annum
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Government Bonds for Individuals (Fixed 5-Year): 2.24% per annum
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Government Bonds for Individuals (Fixed 3-Year): 1.96% per annum
is as follows.
Even so, it has become sufficiently attractive as a product that allows you to receive interest of around 2% in yen while avoiding the risk of losing your principal.
For the 10-year floating-rate bonds, the applicable interest rate is reviewed every six months if market interest rates rise further. The fact that they can be redeemed early after one year from issuance is also a reassuring factor.
Buy Japanese Government Bonds in installments rather than all at once
I believe that instead of purchasing a large amount of Japanese government bonds at once, it is better to purchase a fixed amount every month.
This is because there is a possibility that Japanese interest rates will rise further in the future.
If you invest all your funds into fixed-rate government bonds now, you will not be able to buy them if products with even higher interest rates are issued later.
Conversely, if you keep waiting for interest rates to peak, you will never be able to buy them.
Therefore, I will purchase them in monthly installments. My investment criteria for individual government bonds is over 2%, so for now, I plan to buy a fixed amount of 5-year fixed-rate bonds every month. If it drops below 2%, I will stop buying. Also, if the 3-year fixed-rate bonds start to exceed 2%, I plan to switch to those.
This way, if interest rates continue to rise, the interest rates of the government bonds I purchase will also gradually increase. Even if interest rates fall midway, the relatively higher-interest government bonds purchased before that will remain.
Since the maturities of the government bonds will also be diversified, it is possible to create a system in the future where you receive redemption funds every year or even every month.
Maintain a core holding of Japanese stocks
If corporate profits and dividends increase over the long term, stocks can be expected to yield higher returns than government bonds.
Also, in an environment where prices are rising, the profits and dividends of companies with pricing power may also increase. With only fixed-rate government bonds, their real value will decline due to inflation.
Therefore, I will maintain a core portion of Japanese stocks.
However, I believe that from now on, it will not be a market where all Japanese stocks rise, but rather one where the gap between companies that are strong against rising interest rates and those that are weak will widen.
Continue to hold bank stocks
A representative industry that is likely to benefit from rising interest rates is banking.
If lending rates rise, we can expect an improvement in banks’ interest margins. For banks whose earnings have been squeezed by years of ultra-low interest rates, the normalization of interest rates is fundamentally a tailwind.
However, if interest rates rise too sharply, problems such as valuation losses on held bonds, deterioration in real estate loans, and an increase in corporate bankruptcies will emerge.
Therefore, what is most desirable for bank stocks is not a rapid rise in interest rates, but a gradual increase that does not damage the economy.
I will continue to hold a significant number of shares, with megabanks at the core, but I will not chase high prices solely because of rising interest rates. My stance is strictly to continue holding.
Insurance stocks also have tailwinds
Life insurance and non-life insurance companies are also sectors that easily benefit from rising interest rates.
Insurance companies invest the funds entrusted to them by policyholders in long-term assets such as government bonds. If government bond yields rise, the investment income earned from newly invested funds will improve.
In particular, for companies with strong financial foundations that can stably secure underwriting profits, both rising interest rates and improved investment yields can be expected.
However, since the prices of bonds already held will fall, there is a possibility that valuation losses will occur in the short term. As with banks, attention must be paid to the speed of interest rate increases.
Look at dividends and business strength for trading company stocks
Trading companies do not benefit as directly from rising interest rates as banks or insurance companies do.
However, they have a wide range of businesses that are relatively resistant to inflation, such as resources, energy, food, and infrastructure.
The issue is that borrowing costs will increase due to rising interest rates. Even so, I believe that long-term holding is possible for trading companies that can generate sufficient cash flow and continue dividends and share buybacks.
For trading companies, I will focus on the cash flow generated from their businesses and shareholder returns, rather than expecting only stock price appreciation.
Keep telecommunications stocks as a stable income component
Telecommunications stocks are not necessarily advantageous in a rising interest rate environment.
Because they are often held for the purpose of dividend yield, their relative attractiveness decreases when government bond yields rise. In addition, companies with large capital expenditures and high interest-bearing debt are also affected by rising interest rates.
Even so, telecommunications is a business that is less susceptible to economic conditions and provides stable monthly income.
They are not stocks from which I expect large price increases, but I will keep a certain amount as a stable income component of my portfolio.
Be cautious with real estate and housing stocks
Real estate is the sector most susceptible to the effects of rising interest rates.
Real estate companies conduct business using large amounts of debt. When interest rates rise, interest payments increase, and the expected yield on properties also rises. As a result, downward pressure is placed on real estate prices.
Regarding housing as well, rising mortgage interest rates increase the burden on buyers.
However, companies that own prime properties in city centers, companies that have secured funding with long-term fixed rates, and companies that own logistics facilities and hotels in addition to residential properties have relatively high resilience.
Rather than selling off all real estate and housing stocks, I will narrow down my holdings while checking the size of debt, interest burdens, and the quality of assets held.
My Allocation Strategy for New Capital
For new capital to be invested in Japan going forward, I am considering the following allocation:
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Individual Government Bonds/New Over-the-Counter Government Bonds: 50%
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Japanese High-Dividend/Blue-Chip Stocks: 30%
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Cash/Short-term Funds: 20%
This is the allocation for newly incoming yen funds, not for my entire portfolio.
Since I already hold sufficient Japanese stocks, I will increase my weighting in government bonds with new capital.
If Japanese stocks fall significantly, I will use cash or a portion of redeemed government bonds to increase my holdings of blue-chip stocks.
If stock prices continue to rise, I will not chase high prices unnecessarily, but will wait while receiving interest from government bonds.
Points to Monitor Going Forward
From now on, I will monitor the following four points:
First is the yield on Japanese 10-year government bonds.
I will observe whether it only temporarily exceeds 3% or if it settles in the 3% range. If the 3% range becomes established, it will have a significant impact on the valuation of Japanese stocks.
Second is the Bank of Japan’s policy interest rate.
If the policy rate rises gradually, it is a tailwind for banks and insurance companies, but if it is raised rapidly, it will cool down real estate, consumption, and capital investment.
Third is corporate interest payments.
Even if sales and profits are growing, caution is required for companies whose interest expenses are increasing at a faster rate.
Fourth is the sustainability of dividends.
I will select companies that can maintain and increase dividends through profits and cash flow, rather than simply those with high dividend yields.
Summary
With the 10-year Japanese government bond yield reaching 3%, the investment environment in Japan has changed significantly.
From now on, there is no need to seek income solely from stocks. It has become possible to receive a certain level of interest from Japanese government bonds, which carry no currency risk.
I will neither sell all my Japanese stocks nor shift my funds entirely into government bonds.
I will continue to hold Japanese stocks that generate stable profits and dividends, such as banks, insurance companies, trading houses, and telecommunications, as my core holdings. Meanwhile, I will increase the ratio of Japanese government bonds with new funds, purchasing them in monthly installments.
From stocks, I will obtain dividends and long-term growth.
From government bonds, I will obtain highly certain yen-denominated interest.
And I will keep cash on hand to make additional investments when stock prices fall significantly.
In the era of 3% interest rates in Japan, it is possible to obtain stable cash flow from assets without taking on excessive risk.
Japanese stocks as offensive assets, and Japanese government bonds as defensive assets.
Combining these two is my investment strategy for Japanese stocks and bonds moving forward.