Japan’s Kato Says Talks With Markets Key for Bond Issuance

Japan’s Finance Minister said that discussions with market participants is a key factor in making sure that government bonds are bought and sold stably, as the ministry neared a closely watched gathering with investors.

“We are engaged in thoughtful and careful dialogue with the market, and it is incumbent upon us to make sure that government bonds are being bought,” Finance Minister Katsunobu Kato said in an interview with Bloomberg TV on Friday. As the Bank of Japan steps back from bond purchases, the government needs to find other investors to fill the gap, he said.

Kato’s comments come as the ministry is scheduled to hold a meeting with primary dealers on June 20, three days after the BOJ is broadly expected to slow its pace of bond purchase cuts. 

Market expectations are increasing that the ministry will review its bond issuance plans for the current fiscal year, after a recent jump in the volatility of super-long yields and concerns swirl over Japan’s longer-term fiscal health amid talks of more fiscal spending.

Last month weak demand pushed 30 and 40-year bond yields to record highs, sending a warning to the government that it may need to rethink how it issues bonds. 

While stressing the importance of predictability, Kato also said that the ministry “clearly mentions that the annual plan could be changed during the fiscal year,” although he didn’t comment specifically on changes to the current bond issuance plan. 

On the rise in super-long term yield volatility, Kato said that a winding down of life insurers’ need to comply with regulatory capital requirements was part of the reason behind the sudden jumps.

Market expectations have been intensifying that the ministry may adjust debt issuance by increasing sales of shorter maturity securities and trimming offerings of longer-dated ones. The ministry generally says that adjustments to its issuance plans are possible during the year. Changes usually happen when extra budgets are issued.

“We do decide for example the composition of short, medium or longer term bonds and other matters,” said Kato. “The Ministry of Finance will decide and execute accordingly.”

Earlier this week the ministry pushed back against speculation it may buyback bonds as soon as next month, saying that it’s “unrealistic.” 

While Kato brushed aside a question on buybacks, he referred to the broader bond market environment’s predicament of needing more investors. 

Weaker appetite for government bonds is raising alarm, as the BOJ continues to step back from massive bond purchases. Since last August, the central bank has steadily trimmed its purchases of government bonds at a pace of around ¥400 billion a quarter. Still, it retained ¥559.3 trillion as of the end of last year, more than half the market.

Kato said the country needs to step up its efforts to attract both domestic and foreign investors into the Japanese government bond market, as the central bank continues to pull back. Developing more attractive bond products is one way of achieving that need, he said.

The minister emphasized that while interest rates are under the central bank’s remit, the ministry’s responsible for making sure that government debt continues to be bought.

“I do admit that it might be more stable for the JGB holdings if there were more domestic holders of government bonds,” Kato said, citing foreign exchange risks and other factors. “Whether it may be domestic or international holders of JGBs, what is most important is that government bonds will be purchased.”

With assistance from Takashi Umekawa and Toru Fujioka.

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