Demand for bonds is back with BOJ no longer the only buyer in town

Japanese government bonds look set for further gains with both foreign and domestic investors seen returning to a market where the central bank has often been the only buyer this year.

A pullback in bets on a Bank of Japan policy tweak resulted in record monthly purchases from overseas funds in July, while soaring hedging costs have wiped out the traditional yield premium Japanese investors enjoyed from markets like Treasurys, leading to expectations of a switch back to JGBs from local buyers such as life insurers.