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

Japan has announced a significant adjustment to its bond issuance plan, aiming to reduce the issuance of ultra-long-term bonds by 10% while increasing the issuance of short-term bonds. This move is a response to recent market volatility and concerns over supply-demand imbalances.

Starting from July, the Japanese government plans to reduce the issuance of 20-year, 30-year, and 40-year bonds by 100 billion yen (approximately 6.9 billion USD) per auction until March 31, 2026. This reduction will decrease the total issuance of ultra-long-term bonds by about 10% for the fiscal year. Specifically, the issuance of 20-year bonds will be reduced by 900 billion yen to 1.11 trillion yen, 30-year bonds by 900 billion yen to 870 billion yen, and 40-year bonds by 500 billion yen to 250 billion yen.

To compensate for the reduced issuance of ultra-long-term bonds, the Ministry of Finance plans to increase the issuance of short-term bonds. Starting from October, the issuance of 2-year bonds will be increased by 600 billion yen to 3.18 trillion yen, 1-year bonds by 600 billion yen to 3.9 trillion yen, and 6-month bonds by 600 billion yen to 300 billion yen. Additionally, the issuance of principal-protected bonds designed for households will be increased by 500 billion yen.

As a result of these adjustments, the total issuance of Japanese Government Bonds (JGBs) for the fiscal year ending in March 2024 is expected to decrease by 500 billion yen (3.44 billion USD) to 17.18 trillion yen. The Ministry of Finance is scheduled to present this proposal to primary dealers at a meeting on Friday. It is also expected to clarify its stance on potential bond buybacks, which have been under consideration to address market concerns.

This adjustment comes in response to recent turbulence in the Japanese bond market, where ultra-long-term yields surged to record highs and auction demand weakened. The Ministry of Finance had initially maintained its original issuance plan, but the global bond sell-off exceeded expectations. The reduction in ultra-long-term bond issuance is aimed at alleviating market concerns over supply-demand imbalances and addressing the recent weakness in auction demand and the surge in ultra-long-term yields.

The Bank of Japan's decision to slow down the pace of reducing bond purchases starting from the next fiscal year provides a supportive backdrop for the Ministry of Finance's adjustments. This decision reflects the Bank of Japan's cautious approach to unwinding its massive stimulus measures.

Increasing the issuance of short-term bonds is not without its costs. Issuing more short-term bonds means the government will need to roll over its debt more frequently, making its fiscal situation more susceptible to bond market volatility. This strategy, while aimed at stabilizing the market, introduces new risks that the government will need to manage carefully.