Perspective金融研究工作室

TOKYO—Chikahisa Sumi, the Japanese finance ministry official in charge of marketing government debt, is realistic about what is driving a spike in demand for Japan's bonds from foreigners: They don't have anywhere better to go.

Reuters

Central banks have been stocking up on yen over the last four years, boosting yen reserves by 22%. Above, Bank of Japan headquarters in Tokyo.

"Investors have to put money somewhere," Mr. Sumi, in an office hung with an electronic board that flashes bond yields, currency levels and stock-index prices says. "It's like when I go to the gym and there's no freshly washed socks, so I take the pair that's relatively clean."

Foreign investors seeking safe places to put their cash increasingly are pouring money into Japan's government-debt market: Foreign ownership has risen to a near-record ¥76 trillion ($970 billion), or 8.3% of the total.

That is helping to nudge Japanese bond yields lower but is also sending the yen soaring against the U.S. dollar and the euro, prompting new speculation that the government may step in to push down the currency.

On Tuesday, the yield on the 10-year Japanese government bond closed at 0.735%, up from a nine-year low of 0.72% Monday. In New York, the yen set an 11-year high of 94.12 to the euro and traded at 78.19 to the dollar, just off a seven-week high.

Capital from investors has been flowing into Japan since global credit troubles started in 2007. The trend has accelerated this year, as the status of rival hiding spots has diminished.

Investors say aggressive central-bank action in other havens like the U.S., U.K. and Germany has brought down yields in those countries closer to Japan's super-low levels, making Japanese debt look more attractive. And market watchers say Europe's woes are unlikely to end soon.

Yields on 10-year German bunds have fallen around 36% this year to 1.179%, and those on U.S. 10-year Treasurys are down 25% to 1.404%—rates that may not even cover the expected rate of inflation, investors say. With deflation in Japan, its bonds look relatively more attractive.

In Germany, investors are now paying to put money in two-year bonds, and yields have turned negative on shorter-term bills in France and the Netherlands as well. Japanese two-year yields are at 0.095%.

In the past, "consistently we could find somewhere better" than Japan to put money, says Scott Mather, who oversees investment of $60 billion of bonds and other fixed-income assets at Pacific Investment Management Co., or Pimco. "Now that much of the developed world is priced not too far from Japan, that argument isn't as compelling anymore."

Over the past few months, Mr. Mather says he has shifted money from bonds and bills in the U.S. and Germany and put it into Japan. In the $7.5 billion GIS Global Bond Fund, for instance, exposure to Japan rose to about 18% at the end of June, versus 0.1% at the end of March. Germany's share dropped to 4.5%, from 24.8% in March. About half of the extra investment has been in short-term securities of a year or less, since returns are better on yen bills than those of other major countries, after the effects of currency hedging are thrown in, Mr. Mather says.

Central banks have been stocking up on yen over the past four years, boosting yen reserves by 22%. Foreign companies have also taken note and are selling bonds denominated in yen—known as Samurai bonds—at a near-record pace. Samurai issuance this year totals $16.9 billion, approaching the record levels for the same period last year, based on data tracker Dealogic.

It is an unlikely outcome for a country that has been mired in a spiral of stagnant economic growth, high debt levels and ultralow interest rates for decades. The latest surge in demand for Japanese bonds has come as Japan's public debt burden climbs to a quadrillion yen—more than twice the size of its economy—and nearly as much as all 17 euro-zone countries together.

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In May, Fitch became the latest credit rater to downgrade Japan's long-term debt, assigning it the same A+ rating it gives Estonia, Slovakia and China. Other raters give Japan a higher grade. However, Japanese yields are below those of better-rated countries such as Germany and the U.S.

"JGBs aren't attractive," says Nic Pifer, portfolio manager for Columbia Management's Global Bond Fund, using the shorthand for Japanese government bonds. "But it's one of those things you have to hold your nose and own."

About 10% of the $263 million fund's assets are in Japanese government and corporate debt. On the plus side, Mr. Pifer says, the market is stable relative to many other government-debt markets and returns are predictable.

The vast majority of bonds are held by Japanese investors, who are less likely to sell in a crisis. Local investors hold more than 90% of Japanese government bonds, versus roughly half in the U.S. And since pension funds and insurers managing money for Japan's aging population need to invest in yen-based securities for future payouts, demand for bonds is virtually assured for years to come, says Mr. Sumi, the finance ministry official.

While others at the finance ministry worry about the rising yen and big Japanese exporters say the currency's rise is hurting their profits, Mr. Sumi travels to investment seminars and meeting with potential buyers to urge them to invest in Japan. He says he is often asked whether Japan is concerned about growing levels of investment by potentially flighty foreigners, who could run—sending bond prices falling and interest rates spiking—if the country's fiscal situation takes a turn for the worse.

Although overall foreign investment counts for a much smaller portion of Japan's debt market than it does in the U.S. or Germany, in the short-term issues that are seeing the most investment, overseas buyers now account for nearly 20% of the total.

The more investment from outsiders the better for overall investor mix, Mr. Sumi says. Fundamental demand from domestic investors is so strong that the bond market is unlikely to collapse even if foreign holders flee, he says.

—Takashi Mochizuki and Cynthia Lin contributed to this article.

Write to Phred Dvorak at phred.dvorak@wsj.com