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Core Viewpoint - Recent volatility in Japanese government bonds, traditionally seen as stable investments, has raised concerns among investors following Prime Minister Sanae Takaichi's announcement of early elections and tax cuts, leading to a significant rise in bond yields [1] Group 1: Market Reactions - The yield on 30-year Japanese government bonds surged by 27 basis points to a historic high of 3.88%, while the 40-year bond yield exceeded 4% for the first time [1] - Following the spike in yields, Japan's Finance Minister urged the market to remain calm, resulting in a slight rebound in bond yields, although market sentiment remains fearful with low trading volumes [1] Group 2: Potential Policy Responses - The Bank of Japan (BOJ) may intervene by purchasing bonds to stabilize the market, which would increase bond prices and lower yields, as the BOJ is a major net buyer of Japanese government bonds under its yield curve control policy [1] - The BOJ's current holdings account for over half of the total market, but it is attempting to gradually reduce its bond purchases [1] Group 3: Adjustments to Bond Purchase Plans - The BOJ had planned to reduce its monthly bond purchases by 400 billion yen (approximately $2.5 billion) quarterly starting July 2024, but this plan may be postponed due to increased caution stemming from trade and geopolitical risks [5] - There are suggestions from political figures to delay the reduction of bond purchases, which could further pressure the yen [5] Group 4: Yield Curve Dynamics - Long-term Japanese government bonds have seen the most significant sell-off, leading to a steepening of the yield curve as investors demand higher returns for holding these bonds [8] - The BOJ could adopt a "twist operation" strategy, similar to that used by the Federal Reserve, by selling short-term bonds and using the proceeds to buy long-term bonds [8] Group 5: Government Bond Issuance Strategies - The demand for ultra-long-term bonds, typically absorbed by life insurance companies, is declining, prompting the government to consider reducing the scale of bond auctions to rebalance supply and demand [11] - The Japanese government has already reduced the issuance scale of ultra-long-term bonds to the lowest level in 17 years in its latest fiscal budget [11] Group 6: Pension Fund Asset Allocation - The Government Pension Investment Fund, the world's largest public pension fund, manages approximately 260 trillion yen in assets and holds about $400 billion in foreign bonds [12] - Adjustments in the fund's asset allocation could signal a strong return of Japanese capital, potentially boosting both Japanese government bonds and the yen [12]