Japan Cuts Ultra-Long-Term Bond Issuance by 10% Amid Market Concerns

Japan's government has announced plans to reduce the issuance of ultra-long-term bonds by approximately 10% for the current fiscal year. This decision, outlined in a draft document, is set to be discussed with primary dealers in a meeting scheduled for this Friday. The reduction aims to alleviate market concerns over supply-demand imbalances.

The proposed cuts will affect 20-year, 30-year, and 40-year ultra-long-term bonds. Concurrently, the issuance of short-term bonds and those specifically designed for households will be increased. The total bond issuance for the fiscal year ending in March 2026 is projected to decrease by 500 billion yen, bringing the total to 171.8 trillion yen.

This move comes as the Japanese economy faces significant challenges. The Bank of Japan (BOJ) has been gradually reducing its bond purchases since ending its ultra-loose monetary policy in March 2024. The BOJ has been decreasing its bond purchases by 400 billion yen each quarter, aiming to reduce the monthly purchase amount from 5.7 trillion yen to 2.9 trillion yen by March 2026. However, recent market volatility has led the BOJ to consider slowing down this reduction to maintain market stability.

The BOJ's decision to maintain its policy interest rate at 0.5% and to slow down the reduction in bond purchases is a response to the current economic environment. The BOJ has acknowledged that the rapid increase in long-term interest rates has led to a significant sell-off in the bond market, causing liquidity issues and price adjustments. The BOJ has stated that it will continue to monitor market conditions and adjust its policies as needed to ensure stability.

The BOJ's decision to slow down the reduction in bond purchases is also influenced by the potential impact on the government's debt servicing costs. A rapid increase in bond yields could lead to significant losses for bondholders and increase the government's borrowing costs, exacerbating the already high levels of public debt. The BOJ has indicated that it will consider market participants' views and adjust its bond purchase plans accordingly to maintain market stability.

The BOJ's decision to slow down the reduction in bond purchases is part of a broader effort to normalize its monetary policy. The BOJ has acknowledged that the normalization process is complex and faces multiple constraints. The BOJ has stated that it will continue to evaluate the impact of its policies on inflation and the economy and make adjustments as needed. The BOJ has also indicated that it will consider the potential impact of global trade policies on the Japanese economy and adjust its policies accordingly.