When entering an era of inflation, what were once considered the gold standard of “safe driving” suddenly start to look like laggards.
Individual government bonds are one such example. Principal is protected, they are issued by the government, and interest is paid annually. It certainly sounds good, and they look better than bank deposits.
However, in an environment where prices are gradually rising, that sense of security can thin out more than you might think. It is like thinking you have a folding umbrella for a rainy day, only to find it is actually meant for light drizzle. There is a grim reality where you think you are staying dry, only to realize your socks are completely soaked.
Why individual government bonds are attracting attention and the current economic environment
Individual government bonds are a product designed to be easily purchased by individuals among the government bonds issued by the Japanese government.
You can purchase them starting from as little as 10,000 yen, and if you hold them until maturity, your principal is basically protected. Furthermore, for the 10-year floating rate bonds, the interest rate is reviewed every six months, and you can also choose 5-year or 3-year fixed rate bonds. In a situation where ordinary deposit interest rates are near zero, it is natural for the decision to “use government bonds rather than letting money sleep in the bank” to spread.
However, what is important here is that in the world of investment, “safe” and “advantageous” are two different things. Safe things are often plain. They are so plain that they seem to be left behind in the face of inflation.
Entering the 2020s, inflation suddenly became a familiar topic around the world. In Japan, too, food, electricity bills, daily necessities, and service prices are rising little by little, and a vague sense of “financial hardship” is accumulating in household budgets.
Even if you look like you are gaining if you only look at the nominal interest rate, it is a different story when you look at actual purchasing power. This is a point that cannot be avoided when considering individual government bonds.
The mechanism by which the real yield of individual government bonds decreases due to inflation
Simply put, inflation is a phenomenon where the value of money falls and the prices of goods and services rise. For example, if tea that you can buy for 100 yen now costs 105 yen a year later, you cannot buy it with the same 100 yen.
In other words, the purchasing power of cash has decreased. Investment yields cannot be judged by nominal yield alone; you must consider the real yield after subtracting inflation.
For example, suppose the interest rate on individual government bonds is 0.5% per year. However, if the inflation rate is 2.0% per year, you are effectively losing 1.5% in purchasing power. Even if it looks like a plus in numbers, it is a minus in terms of real-life experience.
This is like your salary going up by 1% while prices go up by 3%. It is a rather unforgiving world where your business card looks impressive but your wallet is thinning out.
In particular, fixed-rate individual government bonds are prone to becoming disadvantageous if inflation progresses after purchase, as the yield at the time of purchase continues.
The 10-year floating rate bonds are more flexible against inflation than fixed-rate types because the interest rate is reviewed every six months, but in the short term, they may not keep up with price increases. Moreover, although individual government bond interest rates have a minimum guarantee, in a period of rapid inflation, their nature of being able to “protect” but being weak at “growing” becomes clearly apparent.
Why individual government bonds are not a panacea for inflation countermeasures
Japanese Government Bonds for individuals are certainly a smarter choice than leaving your assets completely exposed.
It is obviously better to have at least some interest than to let your cash sit idle. However, they are not a panacea for inflation. There are three main reasons for this.
🌟Slow to respond to rising interest rates
While the interest rate for the 10-year floating rate bond is reviewed, it does not immediately link perfectly to market interest rates. There are rules for setting interest rates on Japanese government bonds, and there is a time lag in reflecting them even during periods of rising rates.
When inflation accelerates suddenly, the yield on individual government bonds only follows with a delay. There is a discrepancy in pace: the economy is sprinting, while individual government bonds are merely jogging.
🌟Real yields can lose out to prices
In a world where yields are around 0.3%, 0.5%, or 1.0%, if the inflation rate exceeds these, your assets will effectively shrink. Japan has experienced low inflation for a long time, but there is no guarantee that prices will remain stable and low in the future.
Energy and food prices are easily influenced by overseas factors, and if the yen continues to weaken, import prices will be pushed up further. In other words, while individual government bonds are ‘defensive bonds,’ they are not ‘bonds that beat inflation.’
🌟Hard to serve as a growth engine for your overall assets
Asset protection is important, but assets will not grow through defense alone. A purely defensive approach may be good for weathering a storm, but it is weak at moving the ship forward. Protecting money you will use in the future, such as retirement funds, education funds, and housing funds, is important. However, from a long-term perspective, some growth assets are also necessary to counter inflation. If you try to rely solely on individual government bonds, you may end up drinking the silent poison of opportunity cost in exchange for a sense of security.
Organizing the pros and cons of individual government bonds
Let’s take a calm look at the strengths and weaknesses of individual government bonds here.
In investing, if you jump in based on expectations alone, you will usually be caught off guard. Humans are susceptible to boxes labeled ‘security,’ but the contents of the box are not always what you expect.
🌟Pros
First, they are unlikely to lose principal. If you hold them until maturity, they are relatively safe, backed by the credit of the government.
Second, there is a minimum interest rate guarantee. There is a mechanism that prevents the rate from dropping to zero, even if interest rates are extremely low.
Third, they can be purchased in small amounts. Since you can start in 10,000 yen increments, there is no need to invest a large sum of money all at once.
Fourth, they have liquidity. You can redeem them early after one year from issuance. Of course, this does not mean you should jump to do so immediately, but it is a reassuring factor that they are not completely locked away.
🌟Cons
On the other hand, when interest rate levels are low, interest income is quite meager. The net amount received after taxes is even smaller. Furthermore, because there is a mechanism where a portion of interest is deducted if redeemed early, it is not suitable for short-term trading.
Above all, its greatest weakness is that the real yield tends to become negative during inflation. In other words, you may be giving up purchasing power without realizing it, even while thinking you are buying peace of mind.
It is subtle, but this is quite painful. Money is hardest to notice when it is quietly decreasing, and by the time you realize it, the landscape has already changed.
Differences between government bonds for individuals and other bond investments
Bond investment is not limited to government bonds for individuals. If you are thinking about asset protection, it is important to compare them with other options.
If you overlook this, it is like looking only at compact cars when buying a vehicle and forgetting the existence of SUVs and hybrids.
🌟 Differences from inflation-indexed government bonds
Inflation-indexed government bonds have a mechanism where the principal and interest are adjusted according to price increases. They are clearly more advantageous than government bonds for individuals against inflation. This is because if prices rise, the value received in the future is likely to be linked to that.
However, they are somewhat difficult for individual investors to handle, and there are hurdles such as trading conditions in the secondary market, price fluctuations, and minimum investment units. Nevertheless, if you are conscious of inflation resistance, they are worth including as a candidate for consideration.
🌟 Differences from corporate bonds
Corporate bonds are bonds issued by companies. They often have higher yields than government bonds, but there is credit risk for the issuer. In other words, in exchange for a higher yield than the government, you need to assess the financial strength of the company.
It is easy to jump at high-yield corporate bonds, but there awaits a quietly cruel principle in the investment world: “there is a reason for high yields.”
🌟 Differences from foreign bonds
Foreign currency-denominated bonds are attractive in terms of yield because you can choose products from countries with high interest rates. However, they come with exchange rate risk. While a weak yen is a tailwind, a strong yen will lower the valuation.
In other words, they are currency products disguised as bonds. It is not uncommon for people to think they are holding safe assets, only to find themselves tossed about by the waves of exchange rates. For those with a weak heart, it might be a bit too stimulating.
How to choose bond investments to prepare for inflation
So, what kind of bonds should you choose in an inflationary era? There is no single answer, but the basic principle is to “separate your objectives.” It is a wise approach to diversify the roles of your assets rather than putting everything into government bonds for individuals.
🌟 First, secure living defense funds with government bonds for individuals or cash
It is a basic rule to keep several months’ to a year’s worth of living expenses in a place where the principal will not fluctuate significantly. This is not a place for aggressive investment. These are funds you can rely on when your salary stops or when unexpected expenses arise.
Government bonds for individuals are quite excellent as a place to keep these defensive funds. Even if the yield is not high, it is much better than losing sleep over a market crash. Being able to sleep soundly at night is surprisingly a luxury in investing.
🌟 Consider inflation-indexed bonds and short-term bonds as inflation countermeasures
If inflation becomes full-scale, it is worth combining them with inflation-indexed bonds. Furthermore, short-term bonds have the advantage of being easier to reinvest during periods of rising interest rates.
Rather than being stuck with long-term fixed rates, it is more flexible to rotate them over shorter periods to respond to changes in interest rates. Bonds are not something where ‘holding them for a long time makes you great.’ It is stronger to be able to move maneuverably according to the situation. If money cannot adapt to the times, it just becomes a mere ornament.
🌟 Protect real value by combining stocks and REITs
Stocks and REITs are also candidates as assets that are resistant to inflation. Companies can easily maintain profits even during inflationary periods if they can pass on price increases, and for real estate, rising rents can be a tailwind. Of course, there are price fluctuations, but they can supplement growth potential that cannot be fully captured by bonds alone.
While productivity improvements are expected in the AI era, the gap between winners and losers may widen. In that case, a strategy of protecting only with cash or low-interest bonds will gradually become difficult. In an era of convenience, asset management cannot be taken lightly.
🌟 Have a mindset of diversification
The important thing is not to bet everything on one thing.
Combine cash, government bonds for individuals, foreign bonds, stocks, gold, and real estate-related assets little by little according to your purpose. This is the basic stance in the era of inflation.
Asset management is less of a game of looking for winning tickets and more of a task of creating a configuration where even if you miss, it won’t be a fatal wound. It may not be flashy, but this is much more important for long-term survival.
Summary. Government bonds for individuals are the foundation of defense; think of asset protection as a combination.
What beginners often do first is choose based solely on the product name because it ‘seems safe.’ This is dangerous. The gentler an investment product looks, the more silent its contents can be. What is important is not just the interest rate figure, but the purpose and duration of your money.
For example, if you plan to use the money within three years, you should avoid products with large price fluctuations. For retirement funds 10 years from now, you can consider assets with some growth potential.
Putting long-term risk on short-term funds is like climbing a mountain in sandals on a day when you need boots. Look at your footing before looking at the appearance.
Also, bonds are not ‘buy and forget.’ The interest rate environment changes.
It is necessary to review them periodically while watching inflation rates, policy interest rates, exchange rates, and economic trends. While information gathering has become easier due to AI, it is humans who make the final decisions. No matter how smart AI becomes, you should not hand over the authority to damage your account balance.
In an era of inflation, government bonds for individuals are by no means a bad product.
In fact, it is healthier than holding only cash, and it is an important option for those who prioritize the stability of their principal. However, it is not a panacea for inflation. If prices rise, real yields tend to decrease, and there are situations where you cannot protect your purchasing power just by feeling secure.
That is why it is important to use government bonds for individuals as the foundation of your asset protection and combine them with inflation-indexed bonds, corporate bonds, foreign bonds, and stocks as needed. You cannot grow your assets with defense alone, but you cannot sleep with offense alone. This balance is everything in investing.
Inflation arrives quietly. By the time you notice it, the things you can buy with the same 10,000 yen have decreased. There is hardly any other form of harassment that is so slow-acting and effective.
That is why it is important to review the role of bonds now and prepare your assets in a ‘defensible form.’ Start with government bonds for individuals and gradually move toward a design that can withstand inflation. That is the basis of asset protection that is realistic even for beginners and, moreover, long-lasting.