Last week, the Bank of Japan unveiled a plan to ease the pace of its reductions in monthly bond purchases, aiming to ensure market stability while maintaining a path of normalisation that includes the possibility of additional rate hikes. Japan is planning to cut the issuance of super-long-dated bonds this year, after concerning record highs in super-long yields in recent months stoked market concerns, i.e. normalisation is a two-edged sword. The Finance Ministry proposed reducing the issuance of 20, 30 and 40-year bonds by a total of ¥3.2 trillion ($22 billion) through the end of March 2026, markets were broadly expecting a total reduction of ¥2.3 trillion in super-long issuance this fiscal year, following media reports including those by Bloomberg.
The BOJ is navigating a challenging path, with exports falling for the first time in eight months as the US tariff campaign weighs on global trade, raising the risk of a technical recession after the economy contracted at the start of the year. The value of exports dropped 1.7% in May from a year earlier, even as the export volume climbed 1.8%, suggesting exporters may be absorbing the tariff shock by cutting prices.
Japan’s once-slumbering bond market has roared back to life with a burst of volatility that is echoing around the world. Major debt markets have moved in tandem with Japanese government bonds during the recent rout, with a spike in super-long yields in the Asian nation amplifying ructions fueled by global fears of widening fiscal deficits. Higher bond yields provide more attractive alternatives to stocks, hence creating an evolving headwind moving forward.
- A 30-year auction on Thursday saw strong demand, inflation showed signs of cooling, and Treasuries appear to be retaining their safe-haven qualities as conflict in the Middle East brews.
