In a move to stabilize bond markets and adapt to shifting investor behavior, Japan cuts super-long bond issuance by 10% for fiscal year 2025. This strategic reduction targets 20- to 40-year Japanese Government Bonds, as rising yields and weaker institutional demand prompt strategic adjustments. At the same time, the Ministry of Finance will increase retail bond sales and short-term issuance to attract domestic savers. This shift reflects a broader effort to manage Japan’s record debt and diversify funding amid global economic uncertainty and volatility.
Strategic Rebalancing in Response to Yield Volatility
Reuters reports that the Japanese government is preparing to cut the issuance of super-long-term government bonds by approximately 10% for the current fiscal year, marking an uncommon mid-year revision to its debt issuance framework. A draft of the updated plan, reviewed by Reuters, indicates that total Japanese government bond (JGB) issuance will decline by ¥500 billion, bringing the full-year total down to ¥171.8 trillion ($3.44 billion).
This rebalancing comes in reaction to mounting market anxiety following lukewarm investor interest in recent auctions and a steep spike in long-term bond rates, which reached record levels last month. The Ministry of Finance intends to relieve pressure on the bond market by realigning its issuing strategy in terms of both tenor and volume.
Under the new framework, Japan will sharply reduce issuance of 20-, 30-, and 40-year Japanese Government Bonds starting next month. Each maturity will see a ¥100 billion reduction per auction, significantly scaling back long-term debt supply in fiscal 2025. The annual issuance for 20- and 30-year bonds will drop by ¥900 billion, totaling ¥11.1 trillion and ¥8.7 trillion, respectively. The 40-year bond sale will be cut by ¥500 billion, lowering total annual issuance to ¥2.5 trillion under the revised plan.
To offset the reduction in super-long bond sales and sustain funding liquidity, the Ministry will boost short-term debt issuance. Two-year notes and one- and six-month treasury bills will each increase by ¥600 billion, with bi-monthly two-year JGBs rising by ¥100 billion starting in October to reach ¥2.7 trillion. Retail-focused, principal-guaranteed JGBs will also expand by ¥500 billion to ¥5.1 trillion.
BOJ Caution Underscores Policy Coordination
This mid-year adjustment matches the Bank of Japan’s recent signal to slow down the pace of its bond tapering. The BOJ plans to cut tapering in half to ¥200 billion per quarter in 2026 to protect market liquidity. Analysts see the coordination between the Ministry of Finance and BOJ as a careful yet necessary move for stability. The adjustment also follows the Bank of Japan’s decision to slow bond purchase tapering next fiscal year, reflecting ongoing concerns about market volatility and the cautious rollback of its decade-long monetary stimulus.
Officials are also considering buying back older super-long JGBs with low rates to ease pressure in the bond market. This action aims to balance supply and demand more effectively and improve liquidity conditions in the secondary trading environment.
The revised debt plan will be presented to primary dealers on Friday, with discussions likely focused on implementation and market impact. While the shift to short-term borrowing offers immediate relief, it also raises rollover risks and heightens exposure to interest rate volatility, complicating fiscal management amid global uncertainty.
Implications for Japan’s Fiscal Outlook
Japan’s debt-to-GDP ratio exceeds 250%, leaving policymakers with minimal room to make fiscal errors or risky financial decisions. Super-long bonds were essential for funding, but insurer strategy changes and market turmoil have triggered a fresh policy reassessment. Officials expected weaker demand due to regulatory changes, but last month’s global bond selloff increased pressure and sped up changes.
In response, the government is ramping up retail bond issuance, turning to households as a more stable funding source. These principal-guaranteed JGBs, tailored for cautious savers, are likely to gain prominence if long-term volatility persists.
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