Key Facts
• Long-term interest rates in Japan have exceeded the 2% threshold, reaching a 25-year high.
• Capula Investment Management, founded in 2005 in the UK, operates 8 global offices with over 450 staff.
• Capula manages approximately $35 billion (about ¥5.5 trillion) in assets.
• Core business: relative value trading of government bonds using leverage on mispriced bonds.
• Investors include sovereign wealth funds, pension funds, and life insurers worldwide.
• Japan’s supplementary budget rose to ¥18.3 trillion, with total bond issuance increasing from ¥171 trillion to ¥178 trillion.
• Bank of Japan’s policy rate exceeded 0.5% on January 19, 2026, with real interest rates still deeply negative.
• Market expects BOJ to raise rates about twice a year, potentially surpassing 1% by 2026.
• Rising long-term rates in 2024–2025 resemble a “mini Truss shock,” especially in ultra-long 40-year bonds.
• Increased fiscal spending under Prime Minister Takaichi includes defense, pushing debt-to-GDP ratio to 2% and possibly over 3% next year.
• Yen is weakening against the dollar due to negative real rates and capital outflows; government may intervene in forex markets.
• Exchange rates depend on bilateral interest rates and economic trends; sustained US inflationary growth may limit yen appreciation.
Summary
Masao Asai, co-founder of UK-based Capula Investment Management, highlights Japan’s rising long-term interest rates surpassing 2%, marking a 25-year peak. Capula specializes in leveraged relative value trades on government bonds, managing $35 billion globally. Japan’s aggressive fiscal policy under Prime Minister Takaichi, including a ¥18.3 trillion supplementary budget and increased bond issuance, drives rate hikes. The Bank of Japan’s policy rate recently exceeded 0.5%, with markets anticipating further increases to over 1% by 2026. Asai describes the current bond market conditions as a “mini Truss shock,” reflecting sharp rises in ultra-long bonds. The yen’s depreciation against the dollar continues amid negative real interest rates and capital outflows, with potential government intervention expected. Exchange rate movements will depend on comparative interest rates and economic performance, with sustained US inflationary growth likely limiting yen strength despite BOJ rate hikes.
