TOKYO :Japan’s government issued rare warnings on rising government bond yields and the changing structure of debt ownership in its economic policy roadmap as the central bank gradually trims its presence in the market.
“We must continue efforts to further promote domestic ownership of government bonds to avoid spikes in long-term interest rates caused by supply-demand imbalances,” the government said in this year’s economic and fiscal policy guidelines approved on Friday.
The explicit warning in the guidelines, which form the basis for budget planning, follows a recent bond market rout that briefly pushed yields on super-long Japanese government bonds (JGB) to record highs.
The government debt market, particularly the longest-dated bonds, faces a triple whammy of the Bank of Japan’s tapering of bond purchases, waning demand from life insurers previously driven by capital requirements and intensifying concerns over Japan’s tattered finances.
The BOJ, which owns 46 per cent of JGBs, has been slowing bond purchases as it exits a huge asset-buying scheme.
The central bank is expected to make no big changes to the current bond taper plan at its policy meeting next week but consider slowing the pace of tapering from next fiscal year, signaling a preference to avoid big market disruptions, sources told Reuters.
That raises the importance of domestic private-sector banks, previously the biggest JGB owners, though capital rules are likely to limit their exposure to rate risks.
Foreign investors have boosted their presence in the market over the last decade, but their holding duration is typically less than those of life insurers, Koichi Sugisaki, macro strategist Morgan Stanley MUFG Securities, said.
“A situation where these buy-and-sell investors are holding large interest rate risks is inherently unstable, if not outright dangerous,” Sugisaki said. “It’s like having ‘magma’ ready to erupt at any moment, should something trigger it.”
Banks owned 14.5 per cent of JGBs including treasury discount bills as of the end of last year, while insurance firms held 15.6 per cent. Foreign ownership stood at 11.9 per cent.
Eager to boost purchases by stable domestic holders such as banks, the government is preparing to introduce new floating-rate bonds linked to short-term interest rates to mitigate risks from rising bond yields.
It also plans to expand the scope of investors eligible to buy government bonds specifically designed for retail investors, allowing non-profit corporations and unlisted companies to buy such principal-guaranteed JGBs.
Additionally, the government is considering buying back some super-long JGBs issued in the past at low interest rates to improve the supply-demand balance, on top of an expected plan to trim issuance of super-long bonds.
Growing calls from lawmakers for more stimulus and tax breaks are adding to the bond market woes.
Prime Minister Shigeru Ishiba has so far resisted proposals from some opposition parties for tax breaks aimed at helping households cope with persistent inflation.
He instead instructed his Liberal Democratic Party on Friday to pledge cash handouts in its campaign for an upper house election in July, which would create less fiscal strain. The plan would not tap fresh deficit-financing bonds, he added.
In the annual policy guidelines, the government effectively pushed back the self-imposed deadline for delivering a primary budget surplus from the previous target of fiscal 2025 to “as early as possible during fiscal years 2025 to 2026.”
($1 = 143.9800 yen)
