TOKYO -- When the yield on 20-year Japanese government bonds rose to around 4% last month -- a quadrupling over the past four years -- speculation grew that Japanese investors may start repatriating funds, potentially disrupting the U.S. Treasury market and dollar-yen trading.

Life insurers came under particular scrutiny. Globally, they are big buyers of 20- and 30-year, or "superlong," government bonds because the bonds help match their long-term liabilities, or future payouts to policyholders.

Japanese life insurers, however, played down such speculation. Investment plans outlined late last month for the October-March fiscal second half showed no major shift in asset allocation.

So why are they not rushing back into JGBs? The answer lies in how life insurers run their businesses and the risks they face. Here are five things to know.

They are buying, but only incrementally Portfolio managers at Japan's largest life insurers -- Nippon, Daiichi and Meiji Yasuda -- acknowledge that Japanese interest rates have finally returned to attractive levels, two years after the Bank of Japan began normalizing its ultra-easy monetary policy and tapering bond purchases.

Data from the Japan Securities Dealers Association show that Japanese insurers, including non-life companies, were net buyers of superlong JGBs such as 20- and 30-year bonds for four straight months through September.

"We want to lock in 4% yields on 30-year JGBs while we can," says Meiji Yasuda Life's Kenichiro Kitamura, executive officer and investment planning chief. "JGB yields have risen to levels that are reasonably high by both historical and theoretical standards." The yield gap with U.S. Treasuries has also narrowed sharply. Three years ago, yields on 20-year U.S. government bonds were 360 basis points more than their Japanese counterparts. This year at one point, the gap fell below 120 basis points.

Japanese bonds account for 35% of Meiji Yasuda's portfolio, compared with 44% at Nippon Life and 54% at Daiichi.

But higher yields have arrived after a major regulatory shift in fiscal 2025, which ended in March. New economic-value solvency rules require insurers to value both assets and liabilities at current market rates, encouraging them to match the duration of their assets more closely with their obligations, which can stretch decades into the future.

"Buying super-long JGBs to extend the asset duration has run its course. Any further purchase will be made from the point of view of whether their price is likely to rise and whether they yield better returns relative to other assets," said Daisuke Ishida, executive officer and head of investment planning at Nippon Life.

Replacing old bonds means taking losses There are several ways insurers can fund JGB purchases: use premium income, reinvest cash from maturing bonds or sell existing holdings. For most, the key focus will be on how to replace low-yielding JGBs bought years ago with bonds offering much higher yields today.

The problem is that those older bonds are now worth less than their face value. Selling them would turn paper losses into actual losses.

Unrealized losses totaled more than 30 trillion yen ($190 billion) at 13 major life insurers as of end-June, according to Nikkei research.

Life insurers can offset some of those losses by realizing gains on their large holdings of Japanese stocks, which have roughly doubled in value over the past three years. But there is a limit to how much stock they can sell in any given year, partly because large-scale selling could put pressure on the shares of companies they invest in. Insurers also often have close business ties with the companies they hold equity stakes in. That means replacing low-yielding bonds with higher-yielding ones has to be gradual.

Nippon Life alone had 6.78 trillion yen in unrealized losses on domestic bonds as of end-September. "Replacing low-yielding bonds with higher-yielding ones will be a long-term process," Nippon Life's Ishida said.

Another Nippon Life official stressed the company's commitment to diversification. "We won't change our portfolio dramatically by suddenly stopping investment in one asset or focusing heavily on another." Higher rates come with cancellation risks One concern for life insurers is a further rise in bond yields. Because bond prices fall when yields rise, insurers generally prefer to buy when yields are stable or falling.

Higher rates can also prompt policy cancellations. Policyholders may cash out older policies offering low returns and move their money into other higher-yielding investments, such as investment trusts.

Data from the Life Insurance Association of Japan show that payouts on canceled policies hit 6 trillion yen in the first half of 2026, a record for any six-month period.

Canceling a policy early generally carries a penalty. Such fees can help cover an insurer's cost of selling bonds before maturity, but they do not always cover the full cost, a Nippon Life official said. That is another reason the insurer is cautious about buying super-long JGBs until it is more confident that yields will not rise much further.

The dollar-yen shapes foreign bond decisions The yen has somewhat stabilized against the dollar after falling to 163.99 in July -- which was its weakest level in almost 40 years -- helped in part by joint U.S.-Japan currency market intervention on July 30. On Friday, the yen stood at around 157.60.

Where the dollar-yen rate goes from here matters greatly to portfolio managers. Life insurers can invest in foreign bonds with the currency risk fully or partially hedged, or leave it unhedged.

With hedging costs still high, Nippon Life's Ishida says, "We are inclined to increase unhedged bond investment." That is also consistent with the company's view that the yen still has a downside risk, particularly if the U.S.-Israeli war in Iran deteriorates. Ishida sees higher inflation keeping the U.S.-Japan interest rate gap wide, with the U.S. having more room than Japan to tolerate higher rates.

Daiichi and Meiji Yasuda take a different view. Both are reducing their exposure to unhedged foreign bonds, with Meiji Yasuda's Kitamura seeing a greater likelihood that the U.S.-Japan interest rate gap will narrow. Where will the money go?

All three insurers acknowledge that Japanese interest rates have become more attractive. But they also say they already have enough JGBs. So where will they invest their money? One candidate: Japanese corporate bonds.

"With interest rates rising in Japan, domestic corporate bonds have emerged as attractive targets," said Daiichi Life's Naoto Ichimura, head of investment planning. The yield spread between five-year JGBs and single-A corporate bonds has widened to 56 basis points, the most in 15 years, according to Rating and Investment Information.

Daiichi's overseas bond investments are also concentrated in corporate bonds rather than U.S. Treasurys. About 65% of its foreign bond holdings are dollar-denominated, while 70% are rated single-A or triple-B.

Ichimura also says Daiichi plans to increase its allocation to private equity, although more opportunities are available overseas than in Japan. "We'll consider both Japanese and overseas investments as long as they are attractive," he said.