Japanese investors are set to witness the largest absorption of sovereign bonds in over a decade as the central bank moves to shrink its balance sheet. The country’s Ministry of Finance announced the move in late December, adding to debt holders' challenges with rising trade rates.
The government says it will sell a momentous debt in the fiscal year beginning April 1, 2025. With the announcement, supply could increase by 64% to 61 trillion Japanese Yen ($390 billion) if redemptions and Bank of Japan purchases are considered, based on Bloomberg's data analysis.
Japan's Bond Market Set to Absorb Biggest Supply Amid Conflicting Public Perspectives
Bank of Japan (BOJ) Governor Kazuo Ueda announced that its bond holdings would decrease by 7% to 7% over the next few years, even though they would remain at higher-than-desirable levels over the long term. The bank plans to nearly halve its bond purchases from July 2024 to March 2026, causing a reduction in its holdings over the next fiscal year by 37.6 trillion Japanese Yen means the country's bond market is set to witness a significant increase in supply.
BOJ’s decision could prove detrimental to the country’s bond market, as the governing body also intends to increase rates to better manage inflation. Meanwhile, Prime Minister Shigeru Ishiba is reportedly seeking to amplify his popularity amid local political tensions via additional expenditure plans in an extra budget.
Analyzing the development, 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. Mr. Dojke observes that the governing bank may need to slow down its reductions, especially if the Ishiba administration prioritizes populist spending measures, another move that might demand more bond issuance in the coming year.
However, despite these concerns, not all market participants view the boosted supply of bonds as a significant correction for Japanese debt. Makoto Suzuki, Senior Bond Strategist at Okasan Securities Co., opines that the impact might be restricted, especially as the issuance of super-long bonds is expected to decline.
Suzuki adds that the market demonstrates enough ability to absorb the potential increase in the supply of short to immediate-term notes. However, the potential deluge of bonds has contributed to a bearish sentiment towards Japanese government bonds. Yields have already risen over 2% since the beginning of the fiscal year.
On his part, Makoto Yamashita, Chief Economist at Shinkumi Federation Bank, opines that the BOJ's reduced purchases may generate growing yields as the supply-demand balance worsens. Higher yields could reduce investors' need to purchase bonds to gain carry, worsening upward pressure on yields and further restricting purchases.
The Bottom Line
While there are different perspectives about the possible outcome of the Japanese bond market's expected massive inflows, only time can tell what becomes of the BOJ's decision. In the interim, the Japanese economy will seek to navigate its way around growing bearish sentiments toward its public bonds.