Core Viewpoint - The Japanese government is making significant adjustments to its bond issuance plan in response to market turmoil, reducing the issuance of long-term bonds while increasing short-term bonds to address supply-demand imbalances in the bond market [1][3]. Group 1: Bond Issuance Adjustments - The Japanese government plans to cut the issuance of 20-year, 30-year, and 40-year bonds by 1 trillion yen (approximately 6.9 billion USD) each in upcoming auctions until March 2026, resulting in a total reduction of about 10% from the original plan [1]. - The total planned sales of Japanese government bonds (JGB) for the fiscal year ending next March will decrease by 500 billion yen (approximately 3.44 billion USD) to 171.8 trillion yen [2]. Group 2: Increased Short-term Bond Issuance - To compensate for the reduction in long-term bonds, the Ministry of Finance will increase the issuance of short-term bonds, including a 1 trillion yen increase in the issuance of 2-year bonds, bringing the total to 27 trillion yen [1]. - The issuance of 1-year bonds will also increase by 6 billion yen to 39 trillion yen, and 6-month bonds will see a similar increase to 3 trillion yen [1]. Group 3: Market Response and Context - The adjustments are a direct response to the recent volatility in the Japanese bond market, where long-term yields surged to record highs and auction demand weakened [3]. - The Bank of Japan's decision to slow down the reduction of bond purchases starting next fiscal year provides a supportive backdrop for the Ministry of Finance's adjustments [3]. - The strategy of increasing short-term bond issuance, while addressing immediate market concerns, may lead to more frequent debt rollovers, making the fiscal situation more susceptible to market fluctuations [3].

Global Macro - The rapid rise in Japanese super-long government bond yields since mid-May 2025 has triggered turbulence in the global bond market, with the 40-year bond yield surpassing 3.68%, the highest since its issuance in 2007 [2][6][23] - The increase in yields reflects structural changes in the global bond market amid fiscal expansion and diverging central bank policies, with expectations of further fiscal easing pushing up risk premiums [2][6][23] Japanese Long-term Bond Yield Dynamics - The primary driver of the recent rise in Japanese long-term bond yields is the gradual normalization of the Bank of Japan's monetary policy, which has created conditions for the repricing of super-long government bonds [3][24] - A structural imbalance in supply and demand has exacerbated market volatility, as the absence of the Bank of Japan as a "super buyer" has removed crucial market support [3][30] - The demand side is also under pressure, with rising interest rate expectations leading domestic institutional investors to adopt a wait-and-see approach, further weakening buying power [3][37] Economic Challenges and Policy Dilemmas - Japan's economy faces dual challenges of weak domestic demand and external tariff shocks, with the central bank caught in a policy dilemma [3][52] - The government debt-to-GDP ratio has surpassed 260%, raising concerns about fiscal sustainability as rising long-term bond yields increase borrowing costs [3][60] Spillover Effects on Global Bond Markets - The volatility in Japanese long-term bond yields has significant spillover effects on the U.S. Treasury market, with Japanese insurers and pension funds potentially exerting structural selling pressure on U.S. bonds [3][64] - The global bond market is undergoing a systematic reassessment of risk premiums, with Japan's long-term bond yields acting as a "ballast" in the global interest rate system [3][70] U.S. Treasury Yield Outlook - Short-term risks for U.S. Treasury yields are notable, with expectations of a resolution to the debt ceiling issue leading to substantial net issuance of $300-400 billion within 2-3 months [3][91] - The anticipated fiscal policies under the Trump administration may further pressure U.S. Treasury yields, with a projected range of 4.0-5.0% for the 10-year yield by the end of 2025 [3][105]

Group 1 - Japan is considering reducing the issuance of ultra-long-term bonds to alleviate market concerns over the deterioration of government finances due to recent surges in bond yields [1][3] - The Ministry of Finance (MOF) plans to discuss adjustments to the bond issuance schedule for the current fiscal year, potentially including cuts to ultra-long-term bonds, with market participants in mid-June [1] - Following the news, the Japanese yen weakened, with the USD/JPY exchange rate rising above 143, while the 30-year Japanese government bond yield fell by 20 basis points to 2.835%, the lowest since May 8 [1] Group 2 - Societe Generale reported that measures must be taken to correct the long-term supply-demand imbalance in Japanese government bonds, which the market expects the MOF to address [3] - If the MOF reduces the issuance of 20-year, 30-year, or 40-year bonds, it may increase the issuance of short-term bonds, keeping the total planned issuance for the fiscal year ending March 2026 at 172.3 trillion yen (approximately 1.21 trillion USD) [3] - HSBC's strategist noted that without support from the Bank of Japan, the yield curve for Japanese government bonds may continue to steepen, influenced by potential fiscal measures ahead of the July Senate elections and recent plans by life insurance companies to reduce their holdings of Japanese bonds [3]