Definition and Types
A government bond (sovereign bond) is a debt instrument issued by a national government to raise fiscal funds. Because the issuer is a sovereign state, government bonds denominated in the issuer's own currency are considered the most creditworthy securities available and serve as the 'risk-free' benchmark in financial theory. Japan's outstanding government bond (JGB) balance stands at roughly 1,100 trillion yen - about twice the country's GDP and the highest ratio among developed nations.
JGBs come in several varieties: individual investor bonds (variable 10-year, fixed 5-year, fixed 3-year), coupon-bearing bonds (2, 5, 10, 20, 30, and 40-year maturities), and inflation-linked bonds. Individual investor bonds can be purchased from as little as 10,000 yen, and the variable 10-year type has its rate reset every six months, allowing holders to benefit from rising rates. As of 2024, the variable 10-year individual investor bond yields approximately 0.5-0.7%.
Comparing JGBs and U.S. Treasuries
U.S. Treasuries are the world's most liquid bonds, and the 10-year yield serves as the global interest rate benchmark. As of 2024, the U.S. 10-year yield is roughly 4.0-4.5%, while the JGB 10-year yield is about 0.8-1.0% - a substantial gap that is one of the primary drivers of yen weakness against the dollar.
Japanese retail investors buying U.S. Treasuries must be mindful of currency risk. Even with a 4% yield, if the yen appreciates by more than 4%, the yen-denominated return turns negative. For instance, purchasing at 150 yen per dollar and seeing the rate move to 140 yen at maturity produces a roughly 6.7% currency loss that more than offsets the interest income. Currency-hedged U.S. Treasury funds exist, but the hedging cost (roughly equal to the interest rate differential) significantly erodes the yield advantage.
Common Misconceptions and Practical Uses
The biggest misconception is that government bonds are absolutely safe. Domestic-currency sovereign bonds carry extremely low default risk, but foreign-currency sovereign bonds can and do default. Argentina defaulted in 2001 and 2020, and Greece effectively defaulted in 2012. Moreover, bond prices fall when interest rates rise, so even 'safe' government bonds can generate capital losses. Introductory books systematically cover the relationship between bonds and interest rates
In practice, government bonds are effective for reducing portfolio risk. A balanced portfolio of 60% equities and 40% government bonds delivers only modestly lower returns than 100% equities while substantially reducing volatility. During recessions, equities tend to fall while government bond prices rise, providing diversification benefits. For individual investors, the variable 10-year individual investor JGB is a near-principal-guaranteed safe asset.