Core Viewpoint - The Japanese ultra-long-term government bonds continue to strengthen post-election, driven by cautious statements from Prime Minister Fumio Kishida regarding the food consumption tax reduction plan, alleviating investor concerns about fiscal policy and leading to a further decline in yields [1][5]. Group 1: Market Reactions - The key market reaction stems from Kishida's latest statements, where he acknowledged market concerns about the two-year food consumption tax reduction plan but did not make strong commitments to lowering the tax, easing the bond market's vigilance regarding fiscal sustainability [3][5]. - The 40-year Japanese government bond yield fell by 10 basis points, while the 30-year yield decreased by 9.5 basis points, returning to levels close to early January, indicating a continuation of the post-election rebound [1][4]. Group 2: Policy Signals - The bond market interprets Kishida's election victory as potentially leading to a clearer policy path, reducing the likelihood of extreme fiscal policy scenarios [5]. - Kishida emphasized that the Ministry of Finance would not fill spending gaps by issuing new debt but would explore subsidies, special tax systems, and non-tax revenues for sustainable funding sources [5][6]. Group 3: Institutional Perspectives - AXA Investment Managers' senior fixed-income strategist Ryutaro Kimura noted that Kishida's lack of a strong commitment to lowering the food consumption tax provides a strong incentive for bond investors to restore their long positions in ultra-long-term Japanese government bonds [6][7]. - The downward trend in ultra-long-term interest rates is expected to continue for some time, as market participants are more willing to replenish long positions that had been reduced due to volatility [7]. Group 4: Ongoing Risks - Despite improved market sentiment, investors remain cautious about the potential for renewed volatility, particularly regarding how funding gaps will be addressed if the government lowers the sales tax without increasing debt [8].

Group 1 - The Chief Investment Officer of Asset Management One Co., Shigeki Muramatsu, predicts that the USD/JPY exchange rate will fall below 150 after the Bank of Japan raises interest rates in April [1] - Asset Management One Co. is optimistic about purchasing Japanese super-long-term government bonds, which have become a focal point in the recent volatility of the Japanese bond market [1] - Concerns about the slow pace of monetary policy tightening by the Bank of Japan have contributed to the depreciation of the yen, which is nearing multi-decade lows [1] Group 2 - U.S. Treasury Secretary Scott Bessent has urged Japan to allow the Bank of Japan to raise interest rates further to combat inflation, with market pricing indicating a 69% probability of a rate hike in April [3] - Muramatsu believes that the apparent policy coordination between the U.S. and Japan increases the likelihood of an earlier rate hike by the Bank of Japan [3] - The yield on Japan's 30-year government bonds has stabilized around 3.64% after a significant rise last month, making them attractive for investment [3] Group 3 - If the USD/JPY exchange rate falls below 150, the Japanese stock market may face pressure; however, Asset Management One Co. maintains a long-term bullish outlook on the Japanese stock market due to expected increased investment in risk assets by Japanese households [3]

Core Viewpoint - The market is experiencing increased inflation expectations and pressure from the depreciation of the yen, leading to a potential need for the Bank of Japan to adopt a more aggressive interest rate hike strategy, which has resulted in weak demand for the 2-year Japanese government bond auction held on December 25 [1][4]. Group 1: Auction Results - The bid-to-cover ratio for the 2-year bond auction was only 3.26, down from 3.53 in the previous auction and below the 12-month average of 3.65, indicating weak demand [1]. - Following the auction results, the yield on the 2-year government bond rose by 2.5 basis points to 1.125%, marking the highest level since 1996 [1]. Group 2: Market Sentiment - The weak auction results highlight market unease regarding the Bank of Japan's policy stance, with the 10-year breakeven inflation rate reaching its highest level since data collection began in 2004 [4]. - There are concerns that the Bank of Japan is lagging behind inflation trends, which may lead investors to avoid 2-year bonds due to their sensitivity to such risks [5]. Group 3: Interest Rate Expectations - The market anticipates a possibility of another interest rate hike by the Bank of Japan before September next year, as indicated by overnight index swaps [5]. - The Bank of Japan's recent verbal warnings regarding the yen's depreciation have somewhat alleviated the pressure, but the auction results remain a key indicator of market sentiment towards the central bank's policies [5]. Group 4: Bond Issuance Plans - Investors are concerned about the government's bond issuance plans related to the fiscal year 2026 budget, which is expected to be approved soon [6]. - Major dealers have expressed a desire to increase the issuance of 2-year, 5-year, and 10-year bonds in the next fiscal year while calling for a reduction in the sale of ultra-long-term bonds [6]. - The new issuance of ultra-long-term bonds may be reduced to approximately 17 trillion yen (about 109 billion USD), the lowest level in 17 years [6].

Group 1 - The Japanese government plans to significantly reduce the issuance of ultra-long-term government bonds to alleviate market concerns over excess supply and rising yields, with the new issuance expected to drop to approximately 17 trillion yen (about 109 billion USD), the lowest level in 17 years [1][2] - The Ministry of Finance intends to cut the monthly issuance of 20-year, 30-year, and 40-year bonds by 1 trillion yen each, reflecting ongoing structural pressures in the ultra-long-term bond market [2] - The government maintains stable issuance levels for medium- and short-term bonds, with plans to issue 31.2 trillion yen of 10-year bonds, keeping the monthly issuance at 2.6 trillion yen, consistent with current levels [2] Group 2 - Prime Minister Sanna Takashi has emphasized the need to focus on economic revitalization since taking office in October, indicating a shift away from strict fiscal restoration goals [3] - The upcoming budget is based on a record 21.3 trillion yen stimulus plan aimed at mitigating the impact of rising living costs on the economy [3] - Despite rising bond yields, the government has toned down aggressive fiscal spending rhetoric, with Takashi stating that the government will not resort to "irresponsible" debt issuance or tax cuts [3]

Group 1 - The demand for Japan's two-year government bond auction has dropped to its lowest level in 16 years, with an average bid-to-cover ratio of 2.84, significantly lower than the previous auction's 4.47 and the 12-month average of 4.01 [1][4] - The yield on Japan's two-year government bonds has risen to 0.866%, just a few basis points below the highest level since 2008, reflecting market speculation about a potential interest rate hike by the Bank of Japan [1][4] - Japan's inflation rate has consistently exceeded the Bank of Japan's target of 2%, with the core CPI rising 3.1% year-on-year in July, surpassing market expectations [4][5] Group 2 - Concerns over rising inflation and expectations of increased government bond issuance following the ruling coalition's loss in the upper house elections have contributed to weak demand for Japanese government bonds [4][5] - The continuous rise in long-term government bond yields is starting to deter foreign investors, who are slowing their purchases of Japanese long-term bonds [5] - Market participants are closely watching the upcoming Tokyo CPI data, which is expected to show strong performance, potentially reinforcing the Bank of Japan's belief that inflation is moving towards sustainable targets [5]

Core Viewpoint - Japanese super-long-term government bonds rebounded amid pre-election volatility, reversing earlier sell-off concerns related to potential increased government spending due to the upcoming Senate elections [1] Group 1: Market Reaction - On Wednesday, prices of Japanese super-long-term government bonds increased, with the 30-year bond yield dropping by 10 basis points to 3.06% and the 40-year yield also decreasing by 10 basis points to 3.38% [1] - The 30-year yield had previously surged to its highest level since 1999 on Tuesday, indicating significant market fluctuations [1] Group 2: Investor Sentiment - Katsutoshi Inadome, a senior strategist at Sumitomo Mitsui Trust Asset Management, noted that investors likely engaged in buying to counteract the severe sell-off observed the previous day [1] - Michael Brown, a senior research strategist at Pepperstone, commented on the ongoing political tension as elections approach, suggesting that the market has largely released its sell-off sentiment and may remain cautious until election results are announced [1]

Core Viewpoint - Japan's largest life insurance company, Nippon Life Insurance, anticipates a gradual decline in long-term Japanese government bond yields due to improving demand and progress in US-Japan tariff negotiations [1] Group 1: Economic Outlook - The company expects the Japanese economy to slow down due to tariff impacts but does not foresee a recession [1] - Concerns about fiscal expansion are heightened due to increased US defense spending requests and the upcoming Japanese Senate elections [1] Group 2: Interest Rate and Bond Market - There is a risk of rising interest rates, but the Ministry of Finance is reducing the issuance of long-term bonds, which will narrow the supply-demand gap [1] - The Bank of Japan is likely to slow down the pace of government bond purchase reductions starting from April 2026, considering market stability and participant feedback [1] - An interest rate hike by the Bank of Japan may occur once in the second half of the fiscal year 2025 [1] Group 3: Potential Risks - If US-Japan negotiations falter and have significant economic impacts, there is a possibility that no interest rate hike will occur within the current fiscal year [1]

Core Viewpoint - Japan is facing two significant risk events: the expiration of the equal tariff deadline on July 9 and the Senate elections on July 20, which could impact the yen and Japanese government bond yields [2][5]. Group 1: Equal Tariff Deadline - The deadline for the equal tariff suspension is approaching on July 9, with ongoing trade negotiations between the US and Japan stalled primarily over auto tariffs [5]. - If negotiations break down, the equal tariff rate could increase from the current 24% to between 30% and 35%, raising concerns about global economic growth and potentially leading to a stronger yen [5][6]. - Market participants are relatively optimistic about the tariff issue, with many expecting that the deadline may be extended and that the final tariff rates will not exceed current levels [5][6]. Group 2: Senate Elections - The focus will shift to the Japanese Senate elections on July 20, where the ruling coalition needs to secure at least 50 out of 125 seats to maintain a majority [7]. - If the ruling party loses, the market may anticipate more aggressive fiscal stimulus, which could lead to an increase in long-term Japanese government bond yields [7]. - Unlike the UK, Japan's situation is different due to its substantial current account surplus, which reduces reliance on foreign investment and minimizes direct impacts on the yen's exchange rate [7].

Core Insights - The Japanese ultra-long-term government bond market is facing significant challenges as inflation and interest rate expectations rise steadily [1] - The Japanese Ministry of Finance is considering shifting government bond supply from ultra-long-term bonds to short-term bonds, which may only provide temporary relief [1] - The fundamental issue of rising yields on ultra-long-term Japanese government bonds remains unresolved, leading to a decrease in demand from long-term investors [1] Summary by Categories Market Conditions - The market is experiencing increasing expectations regarding inflation and interest rates set by the Bank of Japan [1] - Long-term investors, typically the largest buyers of long-term bonds, are reducing their demand due to the current market conditions [1] Government Actions - The Japanese Ministry of Finance is contemplating a shift in bond supply strategy, moving from ultra-long-term bonds to short-term bonds [1] - This strategy may only provide a temporary solution to the challenges faced by the ultra-long-term bond market [1] Investor Behavior - There is a notable decline in demand from long-term investors, which is a critical factor affecting the ultra-long-term bond market [1]

Group 1 - Japan plans to repurchase ultra-long-term government bonds to curb the sharp rise in bond yields, which has raised concerns among policymakers [1] - The yield on Japan's ultra-long-term bonds has reached historical highs, influenced by the recent surge in U.S. Treasury yields and domestic supply issues [1] - The Japanese Ministry of Finance will make a final decision on the bond repurchase after meetings with market participants on June 20 and 23 [1] Group 2 - Analysts express optimism about the government's measures, suggesting that the challenges in the Japanese bond market are "technical" rather than "structural" [2] - Approximately 90% of Japanese government bonds are held domestically, indicating that supply-demand imbalances are more about timing than fundamental flaws [2] - The Bank of Japan may discuss slowing down its bond purchases in an upcoming policy meeting, with potential reductions in the quarterly purchase scale [2] Group 3 - The recent rise in long-term bond yields has supported the yen, as capital flows back to Japan may strengthen the currency [3] - Analysts predict that the USD/JPY exchange rate could decline from 144 to 136 by the end of September due to domestic investor behavior [3] - The Bank of Japan's hawkish stance may encourage domestic investors to favor local bonds over foreign ones [3]