Japanese Government Bond Market: Rising Ultra-Long-Term Yields
2025-05-26
■ The current rise in ultra-long-term bond yields is due to a decline in investor demand, not fiscal insecurity.
■ The Bank of Japan did not mention any special response measures, but if yields continue to rise, the market may face a more serious situation.
In the Japanese government bond market, the rise in ultra-long-term yields (with remaining maturities of more than 10 years) is particularly significant. The yields of government bonds across various maturities (the following are closing prices on May 22) indicate that the 10-year government bond yield is 1.580%, which has not yet reached the high of 1.592% recorded on March 27. However, the 20-year government bond yield is at 2.595%, exceeding the high for the same day (2.322%) and marking its highest level since October 2000. Simultaneously, the yields for the 30-year and 40-year government bonds stand at 3.170% and 3.675%, respectively, both nearing their historical highs.
From the perspective of recent unique factors in Japan, (1) the 20-year government bond tender announced on May 20 and (2) the over-the-counter trading volume of April government bonds have both contributed to this trend. (1) The spread (the difference between the winning bid rate and the lowest bid rate) widened to 1.14 yen, the highest level since 1987, while the bid-to-cover ratio was only 2.5 times, the lowest level since 2012. A larger spread alongside a lower bid-to-cover ratio indicates weak investor demand. Furthermore, the upcoming 40-year government bond auction on May 28 is likely to heighten supply and demand concerns in the ultra-long-term range.
(2) Among domestic investors, demand from "life insurance and non-life insurance" companies and "city banks" has declined. The former reported net purchases of only 27 billion yen, while the latter experienced net sales of 517.9 billion yen. According to the investment plans of large life insurance companies announced in late April, "although the rise in ultra-long-term government bond yields has increased investment attractiveness, they will not rush to buy until the market stabilizes." Conversely, foreign net purchases reached 2.2886 trillion yen in April, exceeding 2 trillion for the second consecutive month (2.1828 trillion in March), suggesting that Japanese bonds are being viewed as an alternative to U.S. bonds. However, historically, foreign capital has not proven to be as stable a source of purchases compared to domestic institutions. On the other hand, there is no strong consensus that "Japan's fiscal instability has led to an increase in ultra-long-term yields." This perception is primarily based on International Monetary Fund (IMF) data for 2023, which shows that Japan is the world's largest net foreign asset country. As such, the current rise in ultra-long-term government bond yields in the Japanese bond market can be attributed to the supply and demand imbalance stemming from the retreat of domestic investor demand.
The Bank of Japan referred to the Japanese government bond market in the "Main Opinions of the Financial Policy Decision Meeting" (April 30 and May 1 meetings) announced on the 13th, as well as in the speeches delivered by two review committee members on the 16th and 22nd; however, it did not express the need for any special measures. Relevant comments made by Prime Minister Ishiba during the Senate Budget Committee meeting on the 19th resulted in only limited market reactions. Nonetheless, if yields continue to rise in the future, the situation in the Japanese bond market may deteriorate further, warranting sustained attention.
■ The Bank of Japan did not mention any special response measures, but if yields continue to rise, the market may face a more serious situation.
In the Japanese government bond market, the rise in ultra-long-term yields (with remaining maturities of more than 10 years) is particularly significant. The yields of government bonds across various maturities (the following are closing prices on May 22) indicate that the 10-year government bond yield is 1.580%, which has not yet reached the high of 1.592% recorded on March 27. However, the 20-year government bond yield is at 2.595%, exceeding the high for the same day (2.322%) and marking its highest level since October 2000. Simultaneously, the yields for the 30-year and 40-year government bonds stand at 3.170% and 3.675%, respectively, both nearing their historical highs.
From the perspective of recent unique factors in Japan, (1) the 20-year government bond tender announced on May 20 and (2) the over-the-counter trading volume of April government bonds have both contributed to this trend. (1) The spread (the difference between the winning bid rate and the lowest bid rate) widened to 1.14 yen, the highest level since 1987, while the bid-to-cover ratio was only 2.5 times, the lowest level since 2012. A larger spread alongside a lower bid-to-cover ratio indicates weak investor demand. Furthermore, the upcoming 40-year government bond auction on May 28 is likely to heighten supply and demand concerns in the ultra-long-term range.
(2) Among domestic investors, demand from "life insurance and non-life insurance" companies and "city banks" has declined. The former reported net purchases of only 27 billion yen, while the latter experienced net sales of 517.9 billion yen. According to the investment plans of large life insurance companies announced in late April, "although the rise in ultra-long-term government bond yields has increased investment attractiveness, they will not rush to buy until the market stabilizes." Conversely, foreign net purchases reached 2.2886 trillion yen in April, exceeding 2 trillion for the second consecutive month (2.1828 trillion in March), suggesting that Japanese bonds are being viewed as an alternative to U.S. bonds. However, historically, foreign capital has not proven to be as stable a source of purchases compared to domestic institutions. On the other hand, there is no strong consensus that "Japan's fiscal instability has led to an increase in ultra-long-term yields." This perception is primarily based on International Monetary Fund (IMF) data for 2023, which shows that Japan is the world's largest net foreign asset country. As such, the current rise in ultra-long-term government bond yields in the Japanese bond market can be attributed to the supply and demand imbalance stemming from the retreat of domestic investor demand.
The Bank of Japan referred to the Japanese government bond market in the "Main Opinions of the Financial Policy Decision Meeting" (April 30 and May 1 meetings) announced on the 13th, as well as in the speeches delivered by two review committee members on the 16th and 22nd; however, it did not express the need for any special measures. Relevant comments made by Prime Minister Ishiba during the Senate Budget Committee meeting on the 19th resulted in only limited market reactions. Nonetheless, if yields continue to rise in the future, the situation in the Japanese bond market may deteriorate further, warranting sustained attention.