Core Viewpoint - The Japanese Ministry of Finance is seeking opinions from major traders on reducing the issuance of ultra-long-term government bonds to address severe volatility in the bond market, following previous measures that have not yielded the expected results [1][2]. Group 1: Policy Adjustments - In June, the Ministry announced a significant reduction in the issuance of ultra-long-term bonds, planning to cut the total issuance of 20, 30, and 40-year bonds by 3.2 trillion yen (approximately 22 billion USD) by March next year, doubling the initial draft [2]. - The adjustments aim to alleviate concerns over an oversupply of Japanese government bonds, especially after the central bank reduced its bond purchases [2][3]. - Analysts highlight structural contradictions in the Ministry's approach, suggesting that further adjustments may be necessary [2]. Group 2: Market Response - The Japanese bond market is currently facing selling pressure due to multiple factors, with investor concerns about the future fiscal outlook being paramount [2][3]. - Following the ruling coalition's loss in the upper house elections in July, there are expectations of new fiscal stimulus measures that could lead to a significant increase in bond issuance [2]. - High inflation rates, with July's core CPI rising 3.1% year-on-year, are also driving market expectations for normalization of monetary policy [3]. Group 3: Investor Behavior - There has been a notable decline in overseas investor demand, with net purchases of Japanese government bonds with maturities over 10 years dropping to 480 billion yen in July, only one-third of June's figures [3]. - Domestic institutional investors are also changing their behavior, with trust banks net purchasing 1.47 trillion yen of ultra-long-term bonds, which is about 34% lower than the five-year average [3][4]. - Life insurance companies are expected to become net sellers of ultra-long-term bonds for the first time in history this year [3]. Group 4: Central Bank Challenges - The Bank of Japan faces a complex policy dilemma, as its inaction in raising interest rates amid persistent inflation has heightened market fears of a forced significant rate hike in the future [5]. - Market participants believe that merely consulting and making minor adjustments to bond issuance may not stabilize the market; a clearer signal of monetary policy normalization from the Bank of Japan is deemed necessary [5][6]. Group 5: Fiscal Pressures - The rising interest rates on government bonds are expected to lead to an increase in the budget for debt servicing, with the Ministry planning to allocate 32.3865 trillion yen (approximately 1.57 trillion RMB) for debt repayment in the 2026 budget, which is about 4 trillion yen higher than the original budget for 2025 [5][6]. - The increasing interest burden will further limit the flexibility of fiscal policy [5]. Group 6: Global Implications - The stability of the Japanese bond market has implications beyond its borders, as Japan is the world's largest creditor and the third-largest bond market [6]. - The normalization of interest rates in Japan will influence global capital flows and asset prices, making the coordination of policies between the Ministry of Finance and the central bank a focal point for market participants [6].

Core Viewpoint - Japan's bond market is experiencing a significant sell-off due to concerns over fiscal conditions and persistent inflation, leading to a surge in long-term government bond yields to their highest levels in a decade [1][2]. Group 1: Bond Yield Trends - On August 21, Japan's long-term government bond yields rose sharply, with the 10-year yield reaching 1.61%, the highest since October 2008 [1]. - The 20-year bond yield hit 2.655%, the highest since 1999, while the 30-year yield approached its historical high of 3.2% [1]. - As of 6 PM Beijing time, the 10-year yield was at 1.616%, the 20-year yield at 2.649%, and the 30-year yield at 3.197% [1]. Group 2: Factors Influencing Bond Yields - The primary driver behind the rising yields is investor expectations of new fiscal stimulus measures following the ruling coalition's loss in the July Senate elections, which will increase Japan's already high debt levels [1][2]. - Persistent inflation in Japan has raised the likelihood of interest rate hikes by the Bank of Japan, further pushing up bond yields [2]. - A significant drop in demand for Japanese bonds has been noted, with net purchases of 10-year and longer bonds by overseas investors falling to 480 billion yen (approximately 3.3 billion USD) in July, just one-third of June's purchases [2][3]. Group 3: Market Sentiment and Future Outlook - The bond market is facing a "disastrous" situation due to a substantial decline in demand, as indicated by both yield levels and bid-to-cover ratios [2]. - Analysts suggest that the combination of rising inflation and potential fiscal stimulus will increase the burden on Japan's already high leverage, contributing to the upward pressure on long-term bond yields [2]. - The current market sentiment reflects a preference for Japanese equities over bonds, indicating a shift in investor confidence amid concerns about fiscal risks [3]. Group 4: Central Bank's Role and Potential Interventions - The Bank of Japan's gradual exit from bond purchases has created a demand gap in the bond market, exacerbating the pressure on yields [2][5]. - Experts believe that if the sell-off continues, the Bank of Japan may intervene to stabilize the market, potentially through liquidity injections or adjustments to its monetary policy stance [6]. - Future movements in long-term bond yields will depend on the Bank of Japan's monetary policy direction, fiscal expansion pace, and global interest rate environment [6].

Group 1 - The Bank of Japan maintains its target interest rate at 0.5%, aligning with market expectations, marking the third consecutive meeting without changes [1] - Starting from the next fiscal year, the Bank of Japan will slow down the pace of bond purchase reductions, decreasing the monthly reduction from 400 billion yen to 200 billion yen [3] - The decision to reduce bond purchases was made with an 8 to 1 vote, with one member dissenting, advocating for maintaining the current reduction pace [3] Group 2 - The Bank of Japan's decision to slow down bond purchase reductions reflects concerns over rising long-term government bond yields and market stability [4] - A mid-term review of the reduction plan will take place in June 2026, with the Bank of Japan indicating readiness to respond quickly to rising long-term rates [4] - The central bank's normalization process is critical, especially given the impact of U.S. tariffs on Japan's export-dependent economy [7] Group 3 - Japan's core consumer inflation rate reached 3.5% in April, significantly exceeding the Bank of Japan's 2% target, driven by rising food prices and labor costs [8] - Long-term bond yields in Japan have reached their highest levels since issuance, prompting speculation about potential adjustments in issuance to calm investor fears [8] - The market is closely monitoring the Bank of Japan's communications for any hints regarding future interest rate hikes [8]