INVESTORS are set to face the largest supply of Japanese sovereign bonds in at least a decade as the central bank plans to shrink its balance sheet, adding to debtholders’ woes from rising interest rates.
The Ministry of Finance typically releases a plan in late December on the amount of debt it will sell in the fiscal year starting Apr 1. Should it be roughly the same as the current year, supply will increase 64 per cent to 61 trillion yen (S$528 billion) if redemptions and Bank of Japan (BOJ) purchases are taken into account, according to a Bloomberg analysis.
That is because of the BOJ’s plan to almost halve its bond purchases from July 2024 to March 2026, which will result in its holdings dropping by 37.6 trillion next yen fiscal year. This bodes ill for Japan’s bonds just as the BOJ also plans to raise interest rates further at some point to rein in inflation, and Prime Minister Shigeru Ishiba seeks to shore up his falling popularity with additional spending plans in an extra budget.
“The current pace of the BOJ’s purchase cut is having a severe impact over the market’s supply-demand balance,” said Eiji Dohke, chief bond strategist at SBI Securities. “The central bank may have to slow the reduction” should the Ishiba administration resort to populist handouts whose funding needs may prevent the government from issuing fewer bonds next fiscal year, he explained.
After the central bank left policy unchanged last week, governor Kazuo Ueda indicated that policymakers would be waiting longer for more information on Japanese wages and US president-elect Donald Trump’s policies, before deciding on an interest-rate hike. The BOJ owned more than half of government bonds at the end of November. Ueda said in July that the central bank’s holdings would decrease by 7 to 8 per cent in about two years’ time but they stay at higher-than-desirable levels in the long term.
Not all market players are concerned that rising supply would be a big negative for Japanese debt.
The impact may be limited to preventing too much of a decline in yields even if factors to decrease them emerge, said Makoto Suzuki, a senior bond strategist at Okasan Securities in Tokyo. That is because the issuance of super-long bonds is expected to decline, while the market has enough capacity to absorb a possible increase in the supply of short- to intermediate-term notes, he added.
Still, concern over a bond deluge adds to bearishness towards Japanese government bonds. The securities have dropped more than 2 per cent since the start of the fiscal year, heading for an unprecedented sixth year of losses. Financial companies and institutional investors see the benchmark 10-year yield rising to 1.32 per cent by March 2026 from about 1 per cent currently, according to the BOJ’s latest survey.
With the central bank cutting purchases, “yields risk rising as the supply-demand balance in the bond market worsens”, said Makoto Yamashita, chief economist at the Shinkumi Federation Bank. Higher yields mean investors will not have to buy so many bonds to gain carry, or profits from holding onto debt, “leading to a reduction in their purchases and further exacerbating upward pressure on yields”, he noted. BLOOMBERG
