Japan's Finance Minister Emphasizes Open Dialogue Amid Bond Market Volatility

Japanese Finance Minister Kato Katsunobu has underscored the significance of maintaining open dialogue with market participants to ensure the stability of government bond transactions. In a recent interview, Kato emphasized that the Ministry of Finance is actively engaging with market players to secure the purchase of government bonds, a responsibility that has become more crucial as the Bank of Japan scales back its bond-buying activities.

The Ministry of Finance is set to convene a meeting with primary dealers on June 20, just three days after the Bank of Japan's policy decision. Market observers widely anticipate that the central bank will decelerate the pace of its bond purchase reductions during this meeting. The heightened volatility in super-long-term bond yields has been fueled by concerns over Japan's long-term fiscal health, exacerbated by discussions around increased fiscal spending.

Last month, weak demand pushed the yields on 30-year and 40-year Japanese government bonds to record highs. This development served as a warning to the government, suggesting a potential need to reassess its bond issuance plan. Kato highlighted the importance of predictability, noting that the Ministry of Finance has acknowledged that the annual plan may undergo changes within the fiscal year. However, he did not provide specific details on how the current bond issuance plan might be adjusted.

Regarding the increased volatility in super-long-term bond yields, Kato attributed it partly to the reduced demand from life insurance companies adhering to regulatory capital requirements. Market expectations suggest that the Ministry of Finance may adjust its issuance plan by increasing the issuance of short-term bonds while decreasing that of long-term bonds. The Ministry of Finance has indicated that such adjustments could occur within the year, typically coinciding with the release of supplementary budgets.

Kato stated, "For example, we will decide on the composition of short-term, medium-term, or long-term bonds and other matters. The Ministry of Finance will make the decision and act accordingly." Earlier last week, the Ministry of Finance dismissed speculation that it might repurchase government bonds as early as next month, describing the idea as "unrealistic."

While Kato avoided commenting directly on the possibility of repurchases, he highlighted the broader challenges in the bond market environment, which requires attracting more investors. As the central bank continues to reduce its bond purchases, Japan needs to intensify efforts to draw both domestic and foreign investors into its government bond market. Developing more attractive bond products is one way to meet this need.