Takuji Okubo is managing director at Yen Macro Research.

Across Asia, Japan has become a familiar recommendation for a good holiday at an affordable price. That reputation, however, is new. For decades Japan was known as an expensive country to visit.

In 2012, Mercer ranked Tokyo the most expensive city in the world for expatriates. That year 18.5 million Japanese traveled abroad, and 8.4 million foreigners visited Japan. The balance has completely reversed. In 2025, 14.7 million Japanese traveled abroad, and 42.7 million foreigners visited Japan. The bargain rests on one thing: the weak yen.

The yen traded at 77 yen per dollar at the end of 2011. On a trade-weighted basis, and after accounting for inflation, the yen has lost roughly half of its real value since 2011 (see chart). What has led to such a steep fall in the yen? In my view, the weakness was capital-flow driven, as Japanese pension funds, households and companies have all been moving money abroad in the last 15 years, escaping the zero interest rate environment in Japan. Since the Bank of Japan started raising its policy rate in 2024, those forces are now fading, and Japanese money is starting to turn back toward the yen, whose long fall is ending.

Interest rates in Japan have been low since the mid-1990s, when the country entered its deflationary phase. But the bond yield environment in the last 10 years was unusual. In 2016, the BOJ announced it was implementing its yield curve control policy, targeting the 10-year bond yield at 0%. While some institutional investors held on to Japanese government bonds for regulatory reasons, it was hard to justify Japanese bonds as investment vehicles if you were seeking a return on your money.

The Government Pension Investment Fund (GPIF), which manages 320 trillion yen (about $2 trillion) of public pension reserves, drastically cut its target weight for domestic bonds from 60% to 35% in 2014, and to 25% in 2020, moving the rest abroad. Despite the weak yen, Japanese companies kept building factories and stores abroad, as an aging population and slow growth limited opportunities at home.

Each of those forces is now fading, if not gone completely. Japan is no longer in deflation. The BOJ raised its policy rate to 1.25% in September. The 10-year and 30-year government bond yields are around 3% and 4%, still lower than their peers in the U.S. but no longer abnormally low. In many surveys and interviews, we see institutional investors in Japan voicing their positive assessment on the investability of domestic bonds, although they still remain guarded for fear of investing too early.

Cross-border capital flows have already turned. By August 2026, Japan's purchases of foreign securities over the previous 12 months had become a net sale of 1.5 trillion yen, according to balance of payments statistics. The net sales have likely increased since then. The Ministry of Finance's weekly survey shows Japanese investors selling foreign bonds for six consecutive weeks through Oct. 24. Banks are driving the sales, and they are buying Japanese government bonds instead.

Japan went through a similar episode in 2022, when investors retreated from losses abroad. They went straight back to buying foreign bonds in 2023, though, as yen rates were still low. The driver is now different. At the retail level, government bonds sold directly to individuals are now moving briskly, at more than 1 trillion yen a month. Money is flowing into time deposits again, after a decade in which they paid no more than ordinary deposits.

Capital flows from Japanese companies investing overseas are also starting to change. They needed to convert yen into foreign currencies to invest overseas, but their cumulative investment abroad has grown to a level where the proceeds from that investment can finance new investments. In 2022 to 2025 on average, dividends and retained earnings from overseas investment equaled 103% of their annual additional investment abroad. Companies are still making investments overseas, but Japan Inc. as a whole no longer needs to sell yen to do it.

The largest move may still be ahead. The GPIF, Japan's giant national pension fund, kept its 25% domestic-bond target in its 2025 review, as it probably saw that yen yields still had room to rise. On my replication of GPIF's own allocation rule, domestic bonds warrant a much higher weight. A move to 35% would translate to about 32 trillion yen of bond purchases at the fund's current size. Foreign bonds are the asset class most likely to give way.

Japan's aging population still means that Japan will probably remain a low-growth country relative to its global peers. Both Japanese households and Japanese companies will continue to invest abroad in the longer term. But there has always been ebb and flow in Japan's capital movements, and we are likely to see a rebalancing back to yen in the near term as these flows adjust to the new rate environment for the yen.

The openness and liquidity of financial markets in Japan are also important factors that attract global investors to the country, even when its yields are lower than those of its global peers. Japan will remain a provider of capital to the world in the long term. But the factors behind the yen's depreciation have faded, and the great yen rebalancing is likely to bring some money home in the near term.