TOKYO (Sept 9): A rise in Japanese bond yields may prompt domestic institutional investors to keep more of their money ​at home, Fitch Ratings said in a report on ‌Wednesday.

The ratings agency said it expects Bank of Japan policy rates to rise faster than market consensus in 2026 and 2027, lending support to the yen ​and the relative appeal of domestic debt.

"As Japanese inflation, ​monetary policy and growth prospects lift domestic real rates, ⁠higher local yields will reduce the incentive for domestic institutions ​to chase lower-yielding foreign assets," Fitch analysts, led by head ​of markets research Monsur Hussain, said in the report.

The yield on the benchmark 10-year Japanese government bond hit 3% last week for the first time ​since September 1996, fuelled by investor concerns about inflation, fiscal health ​and mounting pressure for BOJ rate hikes. Markets have priced in a ‌near ⁠certainty the central bank will raise its key rate to 1.25% at its meeting next week.

Global markets shuddered in July when Japan floated the possibility of a pivot by its US$2 trillion (RM8.14 trillion) Government Pension ​Investment Fund to ​domestic assets. ⁠There is no sign the GPIF is adjusting its portfolio yet, but signs are emerging that other Japanese ​institutional funds are reassessing opportunities at home.

Japan's megabanks ​are ⁠cautiously rebuilding their JGB holdings, while the nation's life insurers are selling existing lower-coupon bonds to reinvest in higher-coupon securities, according to ⁠the ​Fitch report.

"We do not expect a fire ​sale of JGBs even if yields across maturities continue to increase," the ratings ​company said.

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