Market Pressures Japan to Adjust Bond Supply and Demand; Eyes on BOJ Meeting in June, Potential Issuance Changes in July

TradingKey - Amid growing concerns over Japan’s widening budget deficit, Japanese government bonds (JGBs) have recently underperformed, with long-term bond auctions repeatedly failing to attract strong demand. 

Analysts expect authorities to take action on both the supply and demand sides, potentially adjusting the Bank of Japan’s (BOJ) bond-buying program at its June meeting, with issuance changes expected as early as July.

In recent weeks, global bond markets have struggled with weak investor appetite — and Japan has not been spared. Yields on Japanese government bonds have surged to multi-year or even record highs.

The sell-off intensified after last month’s 20-year JGB auction, which saw the lowest bid-to-cover ratio since 2012. A 40-year bond auction at the end of May also recorded the weakest demand since the start of 2024. Most recently, a 30-year bond auction on June 5 posted the lowest bid-to-cover since 2023.

UBS analysts warned that the imbalance between supply and demand for ultra-long bonds is becoming a systemic risk, with continued selling by financial institutions potentially triggering a downward spiral.

The bank recommended that the Ministry of Finance consider halting the issuance of bonds with maturities longer than 30 years, citing a lack of market demand amid Japan’s rapidly aging population.

While such a move would be an extreme and passive response, many market observers expect Tokyo to adjust its future bond issuance and purchase plans.

According to insiders, although the BOJ has yet to reach internal consensus, some officials are already calling for a slower pace of normalization to preserve market stability.

The BOJ, which holds around 52% of outstanding JGBs, will review its bond-buying strategy at its policy meeting on June 16–17, with a new plan for fiscal year 2026 expected to be outlined soon after.

HSBC analysts suggested the central bank could reduce purchases of bonds with maturities of 10 years or less, while maintaining or increasing buying of ultra-long bonds to support investor confidence.

Many analysts anticipate that the Ministry of Finance will adjust its bond issuance schedule as early as July to improve auction results and revive demand.

Resona Asset Management expects ultra-long JGB issuance to be cut by 300–400 billion yen per auction, possibly up to 450 billion yen. JPMorgan Chase forecasts a monthly reduction of 2,500–4,500 billion yen starting in July.

Saxo Bank analysts issued a warning: if the Ministry fails to meet these expectations, markets may once again test the upper limits of Japanese bond yields.