Japan’s Bond Market Gets a Reprieve as Finance Ministry Cuts Super-Long Issuance

In a move that may ease some of the upward pressure on yields, Japan’s finance ministry has announced plans to cut super-long bond issuance by ¥3.2 trillion ($22 billion) through March next year. This development comes just ahead of an auction this week that had the potential to reignite turmoil in the debt market.

Escalating Military Tensions Add to Market Uncertainty

The escalating military tensions between the US and Iran over the weekend have added to the uncertainty surrounding super-long yields. Higher oil prices and inflation are expected to pose a significant challenge for the Japanese economy, making the finance ministry’s decision even more crucial. The conflict in the Middle East will undoubtedly complicate the picture in markets, but the plan to reduce sales of 20-, 30- and 40-year bonds may help alleviate some of the concerns.

Rates Strategists Weigh In on the Decision

Naoya Hasegawa, chief bond strategist at Okasan Securities, believes that the direction of supply and demand for super-long government bonds has become clearer after the revised issuance plan. He noted that the bond market is being weighed down by concerns over rising oil prices and the upcoming 20-year bond auction. However, with the reduced sales of 20-year bonds, which is twice the size suggested in earlier draft documents seen by Bloomberg and other media, some analysts are optimistic about the prospects for super-long-term auctions.

Market Volatility Set to Ease

Shoki Omori, chief strategist at Mizuho Securities Co., believes that the ministry’s revised plan will help avert market volatility. He noted that the announcement was made sooner than anticipated to ward off the risk of a failed 20-year bond auction on June 24 and to mitigate market instability seen in May. With the changes presented Friday, super-long-term auctions are poised to regain some stability.

Challenges Ahead for Japan’s Economy

The decision by the finance ministry may prove fortuitous, but it does not address the underlying challenges facing Japan’s economy. Consumer prices are rising at the fastest pace in several years, and an election this summer is likely to encourage more government spending. The changes presented Friday risk shifting some of the problem, rather than eliminating it, by increasing issuance of shorter-dated debt.

Demand for Super-Long Bonds Remains a Concern

Mari Iwashita, executive rates strategist at Nomura Securities Co., notes that whether the decline in liquidity and high volatility in super-long bonds will improve depends on solid demand in the upcoming 20 and 30-year bond auctions. She believes that the extra reduction for the 20-year bond issuance is positive for the bond market. However, Katsutoshi Inadome, a senior strategist at Sumitomo Mitsui Trust Asset Management Co., finds it puzzling that the ministry has now moved so aggressively to reduce 20-year bonds rather than the 30-year maturity.

Buybacks Not on the Table

A ministry official briefing reporters Friday said that some market participants had asked for purchases of super-long bonds while others said buybacks would hurt the autonomy of the market. The ministry was not working on implementing buybacks, and that was not something that could be implemented soon.

Changes to Bond-Issuance Plan

The changes to the bond-issuance plan include:

• 40-year bond issuance will be cut by ¥0.5 trillion to ¥2.5 trillion
• 30-year bond issuance will be cut by ¥0.9 trillion to ¥8.7 trillion
• 20-year bond issuance will be reduced by ¥1.8 trillion to ¥10.2 trillion
• 2-year bond issuance will be increased by ¥0.6 trillion to ¥31.8 trillion
• 1-year issuance will be increased by ¥0.3 trillion to ¥38.7 trillion
• 6-month issuance will be increased by ¥1.8 trillion to ¥4.2 trillion

Overall, the issuance of bonds to the market will edge down by ¥500 billion to ¥171.8 trillion for the year.

Conclusion

The finance ministry’s decision to cut super-long bond issuance may ease some of the upward pressure on yields, but it does not address the underlying challenges facing Japan’s economy. The conflict in the Middle East and rising oil prices will undoubtedly complicate the picture in markets. However, with solid demand in the upcoming 20 and 30-year bond auctions, there is hope that super-long-term auctions may regain some stability.