Investors in Japan are preparing for the largest influx of sovereign bonds in over a decade as the Bank of Japan (BOJ) plans to scale back its bond purchases, exacerbating challenges for debt holders already grappling with rising interest rates. The Ministry of Finance typically announces its debt issuance plans in late December for the fiscal year beginning April 1. If the upcoming issuance mirrors the current year, Japan’s bond supply could surge by 64%, reaching ¥61 trillion ($390 billion) when accounting for redemptions and BOJ purchases, according to a Bloomberg analysis of official data.
This increase in supply is largely driven by the BOJ’s decision to significantly reduce its bond-buying activities from July 2024 to March 2026, with its holdings expected to drop by ¥37.6 trillion in the next fiscal year. This policy shift threatens to undermine the demand for Japanese government bonds, especially as the central bank also plans to raise interest rates to curb inflation. Meanwhile, Prime Minister Shigeru Ishiba’s government is grappling with declining popularity, which could lead to more spending initiatives through an extra budget.
Eiji Dohke, Chief Bond Strategist at SBI Securities, warned that the BOJ’s reduced purchasing pace is putting intense pressure on the supply-demand balance in the bond market. He suggested that the central bank may have to slow the reduction if the Ishiba administration introduces populist measures, such as increased handouts, that require more government borrowing.
Despite these concerns, not all market participants believe the rising bond supply will significantly harm Japan’s debt market. Makoto Suzuki, Senior Bond Strategist at Okasan Securities, stated that the impact may be limited, with the market likely able to absorb an increase in short- to intermediate-term bond issues. He noted that a reduction in the issuance of super-long bonds could mitigate the overall effect on yields.
Nevertheless, the prospect of a bond flood has intensified bearish sentiment toward Japanese government bonds. The securities have dropped more than 2% since the start of the fiscal year, and they are on track for a record sixth consecutive year of losses. Financial institutions and investors expect the benchmark 10-year yield to rise to 1.32% by March 2026, up from around 1% currently, based on the latest BOJ survey.
The combination of reduced BOJ purchases and an oversupply of bonds could lead to further upward pressure on yields. Makoto Yamashita, Chief Economist at Shinkumi Federation Bank, explained that higher yields would reduce the need for investors to purchase large volumes of bonds to gain profits from holding debt. This could, in turn, exacerbate the supply-demand imbalance and push yields even higher.
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