Crédit Mutuel Asset Management is an asset management company of Groupe La Française, the holding company for the asset management division of Crédit Mutuel Alliance Fédérale.
Long‑term Japanese government bonds have been neglected by investors for the past three years. Indeed, 10‑year long‑term yields have risen from 0.5% in 2023 to 2.15% today. The question is therefore legitimate: is it time to return to this market?
A more attractive valuation today
Recent studies estimate Japan’s potential growth rate at around 0%, while the real rate observed through the 10‑year Japanese Government Bond indexed to inflation (JGBi) stands at 0.45%, a level above potential growth. Theoretically, the real interest rate should fluctuate around this potential growth; therefore, a slight cushion exists. By comparison, 10‑year real interest rates in the eurozone are around 0.8% for potential growth of around 1%. Similarly, in the United States, they hover around 1.8% for potential growth of about 2%. The relationship is therefore more favorable for Japanese debt, which no longer appears particularly expensive today.
The current environment and the new government constitute a risk
With growth expected between 0.8% and 1% for fiscal year 2026 by the Bank of Japan (BOJ), activity should nonetheless remain above potential growth; this supports the maintenance of real rates, especially following Sanae Takaichi’s victory in the latest legislative elections. The budget the Prime Minister wishes to pass is 6% higher than the previous one. Artificial Intelligence (AI), defense and semiconductors are identified as requiring investments. She also proposes suspending food taxes for two years. This program, already priced in by the market, likely explains the acceleration in Japanese rates during January.
A macro dynamic that could support a “dovish” monetary policy
Even if growth expectations for 2026 are satisfactory, the trend is not particularly favorable for Japan. GDP for the fourth quarter of 2025 surprised on the downside (0.1% versus 0.4% expected), as did December retail sales (-2% versus -0.5% expected). This disappointing macro dynamic could limit inflationary pressures and thus support the Japanese bond market.
Inflation on a good trajectory
Inflation dynamics (especially wage inflation) are the main factors the BOJ monitors. On both points, the trend is rather favorable. Inflation recently surprised on the downside and is returning close to 2%, and wage inflation is showing a similar trend. It should be noted that Japanese inflation swaps are currently around 1.75%, a level considered high relative to the 10‑year average observed inflation.
An attractive hedged yield
Japanese bonds today offer a currency‑hedged yield higher than that of other G7 government bonds. If the BOJ does not go much further than what markets expect (two rate hikes in 2026 for a terminal rate around 1.5% in 2027), international investors, and at a minimum domestic investors, should be drawn to the Japanese market.
The worst is probably behind us with regard to Japanese rates. Valuations can be considered attractive. Growth‑inflation dynamics are moving in the right direction, and the (currency‑hedged) yield is more attractive than in other regions. In our view, there is no longer any reason to stay away from Japanese government bonds.
Source: Bloomberg, figures as of 02/17/2026
Completed on 18/02/2026. This commentary is provided for information purposes only. The opinions expressed by Crédit Mutuel Asset Management are based on current market conditions and are subject to change without notice. These opinions may differ from those of other investment professionals. This document does not constitute an offer to buy or sell investments, products or services and should not be considered a solicitation, investment advice, legal or tax advice, an investment strategy recommendation, or a personalized recommendation to invest in specific investments. Published by La Française Finance Services, registered office located at 128 boulevard Raspail, 75006 Paris, France, a company regulated by the Autorité de Contrôle Prudentiel as an investment service provider, no. 18673 X, a subsidiary of La Française. Crédit Mutuel Asset Management: 128 boulevard Raspail, 75006 Paris, is a management company authorized by the Autorité des marchés financiers under no. GP 97 138 and registered with ORIAS (www.orias.fr) under no. 25003045 since 04/11/2025. Société Anonyme with share capital of €3,871,680, RCS Paris no. 388 555 021. Crédit Mutuel Asset Management is a subsidiary of Groupe La Française, the asset management holding company of Crédit Mutuel Alliance Fédérale.
