Why is the BOJ tweaking its buying of Japanese government bonds?
TOKYO - The normally sedate Japanese government bond (JGB) market has attracted global attention in recent weeks as a surge in yields sounded warnings for deeply indebted governments.
Yields on super-long JGBs touched record levels last month, meaning higher borrowing costs for the government and creating urgency for the Bank of Japan (BOJ) and Ministry of Finance to steady the market.
Here's what you need to know:
WHAT DID THE BOJ CHANGE?
After extended monetary stimulus to prop up Japan's flagging economy, the BOJ bought more than half of all JGBs and is now trying to gracefully shrink those holdings in a process called quantitative tightening.
Under a plan laid out last July, the BOJ has been slowing its monthly bond purchases by around 400 billion yen steps each quarter. So in the current quarter, the central bank is buying 4.1 trillion yen of JGBs each month, down from 4.5 trillion yen each month from January through March.
The BOJ said on Tuesday the taper pace will slow to 200 billion yen step changes per quarter from next April.
HOW DID WE GET HERE?
Japan has about 1.3 quadrillion yen ($9.07 trillion) in outstanding debt securities, the world's second-biggest amount after the $28.2 trillion U.S. Treasuries market.
Persistent fiscal deficits have caused Japan's ratio of debt to gross domestic product (GDP) to expand to about 250%, the highest in the developed world. Prime Minister Shigeru Ishiba said last month the nation's fiscal situation was worse than Greece's.
But unlike Greece, whose debt-to-GDP ratio was around 150% when the nation was bailed out in 2010, about 90% of Japan's debt is held domestically. That makes the JGB market less vulnerable to investors who punish profligate governments by selling their debt, so-called bond vigilantes.
WHAT TRIGGERED THE JGB SELL-OFF?
Long-dated bonds have sold off around the world in recent weeks as investors grew wary about widening fiscal deficits and debt piles among major issuers, concerns encapsulated by Moody's downgrade of the United States on May 17.
But Japan has some unique issues. Lawmakers are mulling cash handouts and other stimulus to woo voters ahead of an upper house election slated for July. Also, demand has fallen off for super-long bonds among traditional buyers.
Japan's life insurers, for example, have steadily bought the securities over recent years to comply with new solvency regulations. With that buying mostly complete, insurers are now shifting into higher-yielding debt.
A 20-year JGB auction last month laid bare the precarious situation. Demand was the weakest since 1987, as indicated by the auction's tail - the difference between the lowest and average accepted prices.
That triggered a long-term debt sell-off that sent 40-year yields to a record high 3.675%, 30-year rates to an all-time peak of 3.185%, and 20-year yields to 2.595%, the highest since October 2020.
Subsequent sales of 30- and 40-year securities also saw weak demand, sparking concerns of a runaway increase in borrowing costs.
WHAT WAS THE RESPONSE?
The rapid run-up in JGB yields spooked policymakers. In years past, Japan's central bank has come to the rescue in volatile markets by buying bonds and stocks.
However, under Governor Kazuo Ueda, the BOJ has committed to shrinking its balance sheet, leaving the finance ministry to take the lead in calming markets.
Finance Minister Katsunobu Kato warned that higher rates could further imperil Japan's finances and pledged "appropriate" debt management. The government issued rare warnings about rising yields in its economic roadmap last Friday.
Ueda acknowledged views that demand for super-long bonds had declined and that volatility in those yields could impact shorter rates, which have a more direct economic impact.
The finance ministry is now planning on trimming issuance of 20-, 30-, and 40-year bonds, balancing those reductions with increases of shorter-term notes, Reuters has reported. The ministry is also considering buying back some super-long JGBs.
The rise in yields means JGBs are increasingly attractive for overseas investors, especially those looking to decrease dollar exposure. But foreign holders are more likely to dip in and out of the market, creating volatility.
Kato has in recent days talked up the importance of domestic ownership of national debt and proposed a new type of floating-rate note and allowing unlisted companies to buy bonds designed for individual investors.
WHAT'S NEXT?
The finance ministry will meet market participants later this month, which will inform its decisions on bond issuance and buyback changes.
An auction of 20-year JGBs on June 24 will be the next key test of demand for super-long bonds.
(Reporting by Rocky Swift; Editing by Sam Holmes)
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