SINGAPORE, Sept 25 (Reuters) - The tide of Japanese money returning home has begun, but a much larger repatriation of overseas assets is being held back by uncertainty over where Japanese bond yields will peak and how much further the central bank will have to raise interest rates.
The Bank of Japan has likely done enough for now to ward off another wave of speculative bets against the currency, with a rate hike last week, pledges to tackle inflation and, reportedly, a rate check in the foreign exchange
market.
Yet major investors remain reluctant to commit heavily to domestic bonds while yields are still climbing and policymakers offer few clues about how much further rates must rise. Two dovish dissenting votes at last week's meeting and a further selloff in bonds this week only reinforced the uncertainty.
That caution is slowing capital repatriation, leaving one of the world's biggest pools of overseas capital largely parked abroad for now and capping the scope for a sustained yen rally with potentially far-reaching effects across global markets.
"The fast-money carry trade has already been unwound; the slow-money one has not started," said Shoki Omori, fixed income strategist at Deutsche Bank in Tokyo.
"What is left is structural: Japanese pensions... and households holding overseas assets unhedged," which for the yen means the era of relentless declines may be over, but a durable strengthening trend has yet to begin.
The yen has given up most of its sharp gains from early September and traded near 159 per dollar on Friday, not far from the 157 level, which is the median six-month projection of analysts polled by Reuters earlier this month.
The move leaves the yen down only about 1% for the year, though after years of losses it touched a near four-decade low in July just short of 164 per dollar.
Data shows short sellers have retreated in tandem with the price, with speculative positioning in the yen flipping from a deep net short to the largest net long since July 2025 at $9.7 billion in just the first two weeks of September.
Another challenge for the yen, analysts say, is that major central banks have almost all begun raising rates to tackle inflationary pressure from the Middle East war, suggesting interest-rate differentials with Japan are unlikely to narrow soon.
'NOBODY WANTS TO CATCH THE FALLING KNIFE'
The bond maths keeping more Japanese money at home is simple: benchmark 10-year JGB yields have surged two percentage points in under two years to a 30-year high above 3%, eroding the appeal of overseas debt.
A hedged Treasury position pays a Japanese investor less than domestic bonds, according to Deutsche's Omori.
Investors bought 4.8 trillion yen of sovereign debt last month, the largest net purchase in three months, according to Barclays' analysis of Japan Securities Dealers Association data, with banks and insurers among the buyers.
HSBC estimates Japanese banks have sold about $70 billion of foreign bonds this year, versus purchases of $35 billion last year, a retreat felt across markets from Europe to Australia.
Yet life insurers, which hold 438.6 trillion yen ($2.78 trillion) in assets, move slowly and the scale of any allocation shift there is not clear from broad portfolio figures published by the Life Insurance Association of Japan.
"It's early stage in terms of Japanese repatriating," said Aaron Hurd, senior portfolio manager in the currency group at State Street Global Advisors.
"I think the repatriation story can start to pick up steam in 2027," he said. "It is very important for investors to get some sense that Japanese yields have put in their high. Nobody wants to catch the falling knife."
That calculus could change quickly. Japan's finance minister has encouraged the $1.8 trillion Government Pension Investment Fund to increase allocations to local markets, and analysts say a pivot by the fund could spur others to do the same.
"If the GPIF makes it official, or we see the hard data, that domestic JGB allocation actually went up ... it's going to force the other domestic investors to also make changes to their domestic allocations, if they haven't already," said Paresh Upadhyaya, director of market strategy at Pioneer Investments.
Still, as US yields rise alongside expectations of further tightening by the Federal Reserve, the BOJ may struggle to keep pace or drive a sustained yen rally.
"Until that stabilises it's probably not a good time for the BOJ to make another move on the hawkish side, or for the currency market to unwind dollar/yen positions," said Naka Matsuzawa, chief macro strategist at Nomura Securities.
"What we need is someone like lifers, starting to see the end of (interest rate) neutralisation by BOJ and start to repatriate their money - that could cause the yen to go higher than 150, I think. But it's not time for that."
($1 = 157.8700 yen)
(Reporting by Ankur Banerjee in Singapore, Kevin Buckland in Tokyo, Saqib Iqbal Ahmed in New York; editing by Tom Westbrook and Shri Navaratnam)
