Bond Voyage

Read this article to understand:

• The three forces now defining Japan's ultra-long end
• Why changes in curve structure, accounting treatment and policyholder dynamics matter for solvency
• How insurers are responding: Cleaning legacy exposure, rebuilding duration, managing liquidity, leaning on reinsurance and using repacks

The past two years have reshaped the structure of the Japanese government bond (JGB) curve and, with it, the behaviour of the country’s powerful life insurers. After a decade in which the long end of the curve was heavily anchored by monetary policy, Japan now finds itself navigating a very different environment – one where rising yields, shifting supply patterns, and new solvency rules are driving material changes in how insurance balance sheets respond to market conditions.

While the impact of the changes are clearly domestic, rising yields in Japan have also significance worldwide, leading to tightening global curves.

The forces at play

Since the Bank of Japan (BoJ) exited negative rates and dismantled its yield curve control (YCC) in March 2024, the long end has more room to move – by design – while the bank continues to guide short rates and stands ready to act if conditions deteriorate.¹ By late 2025, this shift contributed to multi-decade highs in 20 to 30-year yields and an end to the stability once created by formal rate caps.²

In parallel, Japan’s Ministry of Finance recalibrated its issuance strategy, trimming super-long bond supply in 2024 during stressed conditions and setting out the fiscal year 2026 issuance profile for 20-, 30- and 40-year bonds. While these were subtle changes, they matter in a market where the free float (bonds available for trading by private investors) remains thin and the BoJ still holds a meaningful share of outstanding paper.^3,4

For Japan’s life insurers – who hold over $2 trillion in assets and remain among the largest fixed income investors globally – the pivotal change is regulatory.⁵ From April 2025, Japan’s economic-value solvency regime (J-ICS) requires that both assets and liabilities be valued at current market rates.⁶ So, a move in the 30 to 40-year point can now reprice the entire balance sheet. The result: more deliberate, buffer-aware buying windows (periods when insurers can add duration only if solvency ratios have recovered), and a renewed emphasis on clean, high-coupon JGBs.⁷

Japan’s reset does not negate the role of insurers at the ultra-long end. Insurance majors are still the anchors for 20- and 40-year JGB demand – but timing, tenor and structures are changing as solvency ratios react faster under J-ICS. Purchase decisions now centre on solvency resilience, asset-liability duration alignment and impairment risk.

Market structure boosts the effect of the policy changes. The fiscal year 2026 issuance plan defines the new super-long issuance frequency, while reduced BoJ purchases since mid-2024 have restored price discovery. The latter is helpful in the long run, but it is a source of larger intraday swings in the short term. Liquidity can be patchy at specific issues, so auctions are more exposed to investor sentiment than in the yield curve control era.

Pressure points in a market adjusting to J-ICS

Against this backdrop, several structural pressures are now shaping how insurers behave at the long end of the curve:

Economic-value solvency

Under J-ICS, movements in the 30 to 40-year sector now reprice both assets and liabilities simultaneously. Duration mismatch is no longer a low-key regulatory issue with limited impact; it is immediate, visible and capital sensitive.

Legacy issues

Low‑coupon long‑dated JGBs accumulated during the zero‑rate decade now carry deep unrealised losses, prompting derisking moves by firms such as Nippon Life and Meiji Yasuda.⁸ Figure 1 shows JGB price movements over the last few years under YCC (low-coupon bonds) and J-ICS (high-coupon issues).

Liquidity clusters

Pressures relating to policyholder redemptions now cluster in older, low-guarantee cohorts as credited rates rise – creating clusters of withdrawals rather than broad-based pressure.^9,10

Liquidity pockets and the importance of specific issues

Some ultra-long JGB issues still trade thinly because older JGBs sit on the BoJ’s balance sheet. When those bonds become scarce, liquidity gaps open and execution costs jump until the BoJ’s Securities Lending Facility releases more supply – meaning some yield moves reflect plumbing and not fundamentals.¹¹

Rotation by mid-size insurers into shorter maturities

The caution toward the very long end is not confined to the largest insurers. Mid-size insurers have also become more cautious at the super long end, with firms such as Fukoku Mutual and Asahi Life pivoting to 10 to 15-year tenors or reducing exposure after increases in unrealised losses.^12,13

Repack structures (repackaged transactions or structured notes)

Used to convert offshore or foreign-currency assets into long-dated yen exposure, giving insurers cleaner duration and higher yields when ultra-long JGB supply is limited. By structuring the cashflows into a yen-denominated note, they also reduce mark-to-market noise relative to holding foreign bonds directly.

In practice, these pressures have pushed insurers away from passive management toward a much more dynamic, intentional model of balance sheet management; one that plays out through a set of repeatable actions across the sector.

The next chapter for Japan’s long end bonds

The long end of the Japanese government bond curve is now defined by solvency sensitivity, uneven liquidity and the more selective appetites of both major and mid‑sized insurers. As balance‑sheet pressures move in real time under J‑ICS, insurers are engaging only in narrow windows, leaving volatility to expose where demand can hold and where it quickly falls away.

The challenge ahead is whether domestic long‑dated supply and market depth can adapt to this new rhythm, or whether offshore channels will continue to act as the system’s release valve.

Japan’s yield reset also carries global significance. Higher long‑end JGB yields are pulling up US and European term premia and eroding carry‑trade incentives, reshaping how investors position for duration worldwide.

At the same time, rising domestic yields – and the steepest curve in the G4 – are drawing capital back toward Japan, adding two‑way volatility across global rates (government bond) and currency markets as Japan normalises while others contemplate easing.

Japan’s JGB market is entering a new equilibrium: still anchored by insurers, but now moving to a tempo set by solvency, selectivity and global feedback loops.