The Bank of Japan has cautioned that growing involvement by overseas hedge funds in Japanese fixed income markets could amplify the impact of global market shocks on domestic assets, according to a report by Bloomberg.
In its latest semi-annual Financial System Report, the central bank noted that international hedge funds have significantly expanded their activity in Japan’s government bond markets. It warned that in periods of financial stress, coordinated position reductions across global portfolios could spill over into Japan via deteriorating liquidity conditions.
Foreign investors currently account for around 60% of trading in Japanese government bonds, based on analysis of market data, and their influence is even more pronounced in futures markets, where they represent close to four-fifths of turnover.
The BOJ highlighted that arbitrage strategies employed by overseas hedge funds appear to have increased, raising concerns that shocks originating in other regions could be transmitted more quickly into Japanese rates markets than in the past.
Officials also pointed to broader vulnerabilities in global risk assets, noting that sharp adjustments in sectors such as artificial intelligence-related equities, or escalation in geopolitical tensions including the Iran conflict, could trigger wider risk-off moves affecting cross-border positions.
The central bank’s comments reflect growing attention to the structural role of leveraged and systematic strategies in global fixed income markets, particularly as foreign participation in Japan’s traditionally domestic-dominated bond market continues to rise.
While no immediate instability was flagged, the BOJ stressed the importance of monitoring how quickly foreign-held positions could be unwound under stress scenarios, and the potential implications for market functioning and liquidity in Japanese government debt.
