The Otemachi One Tower building in Tokyo, Japan.
Bloomberg | Bloomberg | Getty Images
Japan’s government plans to cut sales of super-long bonds by about 10% from the original plan in a rare revision to its bond program for the current fiscal year, trimming overall bond issuance as a result, a draft document seen by Reuters showed.
The move aims to soothe market concerns over supply-demand imbalances, after weak demand at recent auctions and a surge in super-long yields to record high levels last month rattled the bond market.
The step also follows the Bank of Japan’s decision this week to decelerate the pace of bond purchases reductions from next fiscal year, signaling its preference to move cautiously in removing remnants of its massive, decade-long stimulus.
The revised issuance plan will be presented to primary dealers for discussion at a meeting on Friday.
Additionally, there are also ideas of buying back some previously issued super-long JGBs with low interest rates to improve the supply-demand balance.
The planned reduction in 20-, 30- and 40-year super-long bond sales would be partly offset by increased issuance of shorter-term notes, as well as bonds specifically designed for households.
As a result, the total Japanese government bond (JGB) scheduled sales for the year through next March are set to fall by 500 billion yen ($3.44 billion) to 171.8 trillion yen, according to the draft of the revised bond program.
Issuing a larger amount of shorter-term bonds, however, would require a careful balancing act as the government would need to roll over debt more frequently and make its finances more vulnerable to bond market swings.
Specifically, the revised plan calls for reducing 20-year JGB sales by 900 billion yen to 11.1 trillion yen, 30-year JGBs by 900 billion yen to 8.7 trillion yen and 40-year JGBs by 500 billion yen to 2.5 trillion yen.
This means starting next month, sales of each of these tenors will be cut by 100 billion yen at every auction.
Instead, the government will boost sales of two-year debt, one-year and six-month treasury discount bills by 600 billion yen each. At every auction starting October, sales of two-year debt will be raised by 100 billion yen to 2.7 trillion yen.
The government will also increase issuance of principal-guaranteed JGBs for households by 500 billion yen.
The original plan had called for cuts in 30- and 40-year bond sales to reflect shrinking demand from life insurers who mostly completed purchases of longer-dated bonds to comply with new solvency regulations.
But as the worsening finances of advanced economies drew more market scrutiny, super-long JGBs became a target of a global bond sell-off last month.