Japan's bond market functionality worsens sharply on Trump-induced volatility

By Leika Kihara

TOKYO, May 19 (Reuters) - Japan's bond market functionality deteriorated sharply in the three months to May, a central bank survey showed on Monday, a sign of strain caused by uncertainty over U.S. trade policy and volatile moves in super-long yields.

The diffusion index measuring the Japanese government bond (JGB) market's functioning plumetted to -44 in May, down from -13 in February, marking the lowest reading since May 2023, the survey conducted by the Bank of Japan (BOJ) on market participants showed on Monday.

The index thus worsened for the first time in nine quarters and suffered the fastest pace of decline on record, underlining the significant impact of U.S. President Donald Trump's April 2 announcement of reciprocal tariffs, including on Japan.

Many respondents cited heightening volatility from Trump's tariff announcement as sapping liquidity mainly for super-long JGBs, a BOJ official told a briefing on the survey.

The survey will be among factors the BOJ will scrutinise when it conducts in June a review of its bond taper plan that runs through March, and compile a programme for April 2026 and beyond.

Growing market attention to Japan's worsening fiscal state is also pushing up super-long yields, as Prime Minister Shigeru Ishiba faces mounting political pressure to ramp up spending or cut taxes ahead of an upper house election slated for July.

Yields on super-long JGBs have risen steadily since April, even as those on other maturities remain stable. The 40-year yield JP40YTN=JBTC hit a record high of 3.445% last week.