Global currency and interest-rate markets are heading into a massive change as rising Japanese yields are luring domestic investors to park their money at home at the expense of holding foreign assets, according to RBC Capital Markets.

"For the first time since 2020, Japanese investors will have yields attractive enough to invest at home,” Richard Cochinos, a currency strategist at RBC Capital Markets in New York, said in a Wednesday note. "At a point in the not-too-distant future, Japanese investors will be indifferent from buying anywhere on the Japanese government bond curve versus U.S. Treasuries.”

The increasing rate earned on Japanese government debt has been a key focal point of global investors — and highlighted as a risk to demand for U.S. bonds — since Bank of Japan officials shifted away from ultra-easy monetary policy more than a year ago. Nonetheless, foreign demand for Treasurys has proved altogether sticky and a recent surge in long-term Japanese yields has outpaced major peers, dragging the returns that come from owning the securities.

For yield-focused domestic investors, however, the prospects appear increasingly favorable, RBC notes. The firm estimates that by the end of next year, Japanese investors will earn some 30 to 120 basis points of excess yield, depending on which part of the government bond yield curve they choose to invest. That’s already the case for longer-dated Japanese government bonds, while near-term debt is increasingly becoming more favorable.

"A pivot in hedged yields, the falling cost of hedging, their impact on global rates and currency flows all suggest in 2026 Japan will be facing a sea change,” Cochinos said.

RBC’s analysis is based on a range of factors — from the yield on duration-matched Treasurys and Japanese government bonds to the annualized cost of carry that investors in Japan face when hedging dollar assets back into yen to historic hedge ratios among those investors.

Currency markets are particularly susceptible to swings in short-term interest rates. According to RBC’s own projections, overnight rates in Japan will rise some 50 basis points by the end of next year, compared to a 130 basis point fall in U.S. benchmark borrowing costs. Such a swing reduces the cost of carry for those in Japan and could boost the hedge ratios carried by major investors.

Should Japanese life insurers raise their collective hedge ratio from 45% to 60%, that would drive some $173 billion in flows away from the dollar to the yen, RBC argues — one key support for their call for a stronger Japanese currency in the year ahead.

The benefits of rising Japanese yields are less clear for foreign investors in the country’s debt. Some global fund managers have bought long-dated Japanese debt in recent months on the premise that the market is incredibly cheap with yields at near-historic highs. But that trade hasn’t worked out, and one gauge of dollar-hedged long-term Japanese bonds is down some 7% this year, Bloomberg has reported.