Japan’s bond market is being hit by increased risk as yields rise and fewer people want to buy bonds. It is becoming harder for government and central bank officials as a lack of interest in auctions and increased pressure threaten the financial system.
Demand weakens as investors exit
Investor confidence in Japan’s super-long-term government bonds has dropped, triggering what traders describe as a “buyers’ strike.” Yields on 30-year bonds surged to 3.2% from 2.3% earlier this year, while 40-year bonds climbed to 3.7%. Two consecutive failed auctions highlighted the lack of interest. The trend points to a deeper problem: traditional buyers are stepping away and new ones have yet to emerge.
Demographics play a significant role in the falling demand. According to UBS Asset Management, Japan’s aging postwar baby boomers are no longer investing for the long haul. Life insurance firms, which previously absorbed long-dated bonds, have also scaled back their purchases. A recent 20-year bond auction received the lowest interest since 2012. This week’s 40-year bond sale recorded the weakest bid-to-cover ratio in nearly a year, further underscoring the lack of participation from key institutional investors.
Central bank tightening raises market stress
The Bank of Japan has created more stress in the market by increasing interest rates to 0.5% and slowly lessening its open market bond purchases. Bond purchases by the central bank will be cut by ¥400 billion every quarter until March 2026. About half of Japan’s bond market is owned by the BoJ and further reducing stimulus is causing worries about the market’s stability.
Attention now shifts to mid-June, when the BoJ’s Monetary Policy Committee will assess the impact of its reduced bond purchases. Market analysts expect that the central bank may consider slowing the pace of tapering to avoid further stress. JPMorgan economists noted that rising yields have made the meeting especially significant, with concerns that policy remains behind the curve even after four years of inflation above target.
Ministry of finance may adjust debt strategy
The Ministry of Finance is planning to talk with financial players to discuss issues related to its national debt. According to reports, the ministry wants to cut its plans for selling long-term bonds which should help relieve pressure on the market. After recent news that officials were in discussions with brokers, agriculturals saw yields go down slightly. Barclays strategist Shinichiro Kadota said the failed auctions highlight deep structural issues. With household savings shifting into NISA accounts and life insurers facing reduced income, the supply of willing bond buyers continues to shrink.