Investors are set to face the largest supply of Japanese sovereign bonds in at least a decade, as the Ministry of Finance plans to shrink its balance sheet amid rising interest rates, further adding to the difficulties for debtholders. The ministry typically releases its debt sales plan in late December for the fiscal year starting Apr 1, and if it remains similar to the current year, the supply will increase by 64% to ¥61 trillion (US$390 billion), factoring in redemptions and the Bank of Japan's (BOJ) purchases, according to a Bloomberg analysis of official data.
This significant increase in supply comes as the BOJ plans to nearly halve its bond purchases from July 2024 to March 2026, leading to a ¥37.6 trillion reduction in its holdings in the next fiscal year. The move could be detrimental to Japan's bond market, particularly as the BOJ also considers raising interest rates to manage inflation, with Prime Minister Shigeru Ishiba also seeking to boost his popularity through additional spending plans in an extra budget.
Eiji Dohke, Chief Bond Strategist at SBI Securities Co, highlighted the severe impact of the BOJ's reduced purchases on the market's supply-demand balance. He noted that the central bank might need to slow down its reductions if the Ishiba administration resorts to populist spending measures, which could require more bond issuance in the coming fiscal year.
The BOJ, which held more than half of Japan's government bonds at the end of November, is gradually reducing its bond holdings. BOJ Governor Kazuo Ueda indicated that its bond holdings would decrease by 7% to 8% over the next two years, although they would still remain at higher-than-desirable levels long term.
Despite these concerns, not all market participants view the increased supply of bonds as a major negative for Japanese debt. Makoto Suzuki, Senior Bond Strategist at Okasan Securities Co., suggested that the impact might be limited, particularly as the issuance of super-long bonds is expected to decline. He added that the market has sufficient capacity to absorb the possible increase in the supply of short- to intermediate-term notes.
Nevertheless, the potential deluge of bonds has contributed to a bearish sentiment towards Japanese government bonds, with yields already rising more than 2% since the start of the fiscal year. The securities are on track for a record sixth consecutive year of losses. According to the BOJ's latest survey, financial firms and institutional investors expect the benchmark 10-year yield to rise to 1.32% by March 2026, from around 1% currently.
Makoto Yamashita, Chief Economist at Shinkumi Federation Bank, warned that the BOJ's reduced purchases could lead to rising yields as the supply-demand balance worsens. Higher yields could reduce investors' need to purchase bonds to gain carry, exacerbating upward pressure on yields and further limiting purchases.
Bloomberg
