As tracked by the S&P Japan Bond Index, a broad base benchmark that measures the performance of the government and corporate local currency bonds in Japan, the total outstanding par amount have reached over 1,070 trillion Yen this August. Not surprisingly, over 92% of them are government debts, which expanded 3.7 times since the index first valued on January 30, 1998.

As shown in exhibit 1, the total return of the S&P Japan Government Bond Index and the S&P Japan Corporate Bond Index both advanced 1.34% and 1.23% year-to-date (YTD), as of August 8, 2014. It is interesting to note that while the yield-to-maturity of the S&P Japan Corporate Bond Index has tightened by 21bps to 0.399%, the spread of the two sector indices have contracted significantly from 15bps last December to currently 3bps, see Exhibit 2.

It is inevitably getting more difficult to source for the yields. Particularly, following the Abenomics and the unprecedented purchases of government debts by Bank of Japan, the yields have been kept low to support growth. Even the consumer prices have shown signs of improvement in the recent months, the bond yields continue to edge lower.

Contrarily, as part of the S&P Global Developed Sovereign Inflation-Linked Bond Index that measures the performance of the inflation-linked securities market,  the S&P Japan Sovereign Inflation-Linked Bond Index rose 3.84% YTD, see Exhibit 3, and its yield-to-maturity has also shifted from negative territory to 0.648% in the same period, which is a level last seen in early 2012.

Exhibit 1: The Total Return of S&P Japan Corporate Bond Index and the S&P Japan Government Bond Index

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