Japan Encourages Domestic Bond Buying Amid Yield Surge, Delays Surplus Target

The Japanese government is set to encourage more domestic investors to hold Japanese government bonds, according to a draft of the annual fiscal policy plan. This move underscores the government's concern over market volatility and the potential for further increases in bond yields. The plan aims to stabilize the bond market by increasing domestic demand for government debt, which could help mitigate the impact of rising yields on the economy.

The draft plan highlights the government's strategy to bolster domestic investment in Japanese government bonds. By encouraging more domestic investors to hold these bonds, the government hopes to create a more stable market environment. This initiative is part of a broader effort to manage market risks and ensure the sustainability of Japan's public debt.

The decision to focus on domestic investors comes amid growing concerns over the recent surge in bond yields. The government's call for increased domestic investment is intended to address these concerns and maintain market stability. The government's plan to encourage domestic investment in Japanese government bonds is a proactive measure to manage market risks and ensure the stability of the bond market. By focusing on domestic investors, the government aims to create a more resilient market environment that can withstand fluctuations in bond yields and maintain investor confidence. This initiative is part of a broader strategy to manage Japan's public debt and support economic growth.

Notably, the draft plan delays the target date for achieving a basic budget surplus from the originally planned fiscal year to 2025 or 2026. This adjustment adds uncertainty to the market, especially as concerns over Japan's massive debt continue to grow. The government attributes this delay to the need to appropriately respond to the uncertainties brought about by trade policies. This delay was already hinted at in the government's fiscal outlook released in January, which indicated that Japan would not be able to meet its long-term goals for the year.

The government's draft plan prominently mentions the Japanese bond market, indicating the cabinet's deep concern over market volatility. In May, the demand for 20-year bonds reached its weakest level in over a decade, followed by a lackluster performance in the sale of 40-year bonds. This further confirms the deteriorating supply-demand dynamics in the market. The government has been actively assessing market conditions, as evidenced by recent market surveys conducted by the Ministry of Finance, seeking feedback on bond issuance and current market trends from a wide range of investors.

As the Bank of Japan gradually exits its large-scale bond-buying program, concerns over the worsening supply-demand balance have deepened. Last year, the central bank announced plans to reduce bond purchases by 400 billion yen per quarter, aiming to cut monthly purchases to around 2.9 trillion yen by early 2026. Despite the reduction, the Bank of Japan still holds more than half of Japan's outstanding government debt, the highest ratio among developed economies. The central bank is expected to announce its bond purchase plans for April 2026 and beyond at its upcoming policy meeting, taking into account feedback from market participants. Bank of Japan Governor Ueda Kazuo stated in parliament that while many market participants support continued reductions in bond purchases, there is no consensus on the appropriate pace.

Historically, domestic investors have held the majority of Japanese government bonds, a key factor in maintaining market confidence. The government's draft fiscal policy plan also includes a delay in achieving the original target of a basic budget surplus. The government cites the need to appropriately respond to uncertainties arising from trade policies as the reason for this delay. The January fiscal outlook already indicated that Japan would not achieve its long-term goals for the year.