Katsunobu Kato, Japan's finance minister, speaks during an interview in Tokyo, Japan, on Friday, June 13, 2025. Kato said discussions with market participants are a key factor for ensuring government bonds are bought and sold stably ahead of a closely watched ministry meeting with investors. Photographer: Shoko Takayasu/Bloomberg
Tokyo: Japan’s larger-than-expected cut to super-long bond issuance has potential to ease some upward pressure on yields just before an auction this week that risks reigniting turmoil in the debt market.
The move by the Finance Ministry may also prove fortuitous in light of the US attack on Iranian nuclear sites over the weekend.
The escalating military action adds to the dangers for super-long yields via higher oil prices and inflation.
Japanese government bonds dropped yesterday morning in Tokyo, while the 10-year yield was up two basis points to 1.415%.
While the conflict in the Middle East will complicate the picture in markets, the plan to reduce sales of 20-, 30- and 40-year bonds by a total of 3.2 trillion yen or about US$21.9bil through March next year was initially judged by rates strategists in Tokyo as a calming factor for trading in this key sector.
The changes were presented by officials late last Friday during a meeting with primary dealers.
“The bond market is being weighed down by concerns over rising oil prices and the upcoming 20-year bond auction,” said Naoya Hasegawa, chief bond strategist at Okasan Securities. But “the direction of supply and demand for super-long government bonds has become clearer after the revised issuance plan”.
The latest plan includes a reduction in 20-year bond sales that is twice the size suggested in earlier draft documents seen by Bloomberg and other media.
A poorly received auction of this maturity debt last month set a fire under super-long yields in Japan and spread in global markets.
“The ministry publicised its revised plan sooner than anticipated to ward off the risk of a failed 20-year bond auction on June 24 and to avert the market volatility seen in May,” Shoki Omori, chief strategist at Mizuho Securities Co, said immediately after the news. “In light of these announcements, super-long-term auctions are poised to regain a measure of stability.”
The positive impact the ministry may have through adjusting issuance doesn’t overcome the challenge to Japan posed by consumer prices that are rising at the fastest pace in several years, and an election this summer which is likely to encourage more government spending.
The changes presented last Friday also risk shifting some of the problem, rather than eliminating it, by increasing issuance of shorter-dated debt.
“Whether the decline in liquidity and high volatility in super-long bonds will improve will depend on if there is solid demand in the upcoming 20 and 30-year bond auctions,” Mari Iwashita, executive rates strategist at Nomura Securities Co, said last Friday. Still, she noted that the extra reduction for the 20-year bond issuance is “positive for the bond market”.
The 30-year auction is set for July 3.
Katsutoshi Inadome, a senior strategist at Sumitomo Mitsui Trust Asset Management Co, said it was puzzling that the ministry had now moved so aggressively to reduce 20-year bonds rather than the 30-year maturity, where there are also supply and demand issues.
He said last Friday there was still a possibility that the reduction in 30-year bonds could be expanded further.
The planned revision to issuance was the second move by policymakers last week to respond to challenges that have emerged in Japan’s bond market.
The Bank of Japan said earlier last week that it would slow down its withdrawal from the market from next year in a move aimed at ensuring stability.
A ministry official briefing reporters last Friday said the plan would likely become officially approved early this week. — Bloomberg
