Is buying Japanese Government Bonds in 2026 worth it?
There have been a lot of posts online recently which basically say something like "Buying government bonds that only yield around 1% when the inflation rate is closer to 2% is nonsense! Only a fool would do that!"
That's just silly. Assuming that were true, the corollary would be that holding cash is even more foolish, because it earns no interest at all. And yet people do, and should hold cash.
Ideally, for most people, their money should be separated into two buckets:
- Short term money - held in domestic cash.
- Long term money - held in investments, such as stock indexes.
I'll gloss over the definition of "short term" here, except to say that I would use a rough cut-off of 5 years. Likewise, long-term implies anything over 10 years.
This is because you can't pay your electric bill or rent with stocks, bonds, real estate, or gold. You need to sell those things, and then use the proceeds to buy things. Not only can the value of these things fluctuate in the short term, there are often transaction fees associated with buying and selling.
Besides covering monthly expenses, cash also lets you keep your options open, so that you can afford to spend money even when the stock market or price of gold is down. In other words, it can help prevent you from needing to sell at a loss.
Yet notice that there is a gap between the 5 and 10 year numbers. Even if you used 1 and 15 years instead, there would be a gap. There is always going to be a gap, and you can exploit that gap by investing in very low risk assets that earn at least some return.
Say you have 10,000,000 yen. You decide you need 200,000 yen per month for living expenses, and you are happy with a 3 month buffer. That means you have 600,000 sitting around in cash, with 400,000 left over for investing. In this kind of case, I don't really see the use of government bonds, because the amounts involved are small enough to perhaps not be worth the effort.
If you have instead 100,000,000 yen, the same 200,000 yen monthly expenses, and want a 6 month buffer - well then you might opt 600,000 in cash, and another 600,000 in government bonds. You can invest the rest knowing that you have a 6 month buffer, and if the worst does happen, you will have plenty of time to sell the government bonds during the first 3 months. Since you probably won't have to sell them, you can collect interest on them in the majority of cases.
Another thing to keep in mind is that holding cash or bonds isn't foolish just because they earn less than inflation - you just want your overall portfolio to at least keep op with inflation. If half of your money is earning 8%, and the other half is earning 0%, then you are earning 4% on average. If you convert half of the 0% cash into bonds that earn 1%, then you will be earning above 4% on average while taking on close to zero additional risk. (Sure, the government might fail in some doomsday scenario, but in that case paper money would be worthless too).