Japan’s bond market is under pressure and the government faces uncomfortable decisions

Japan’s bond market is under real pressure, and both the government and the central bank are facing some of the most uncomfortable decisions in years.

Borrowing costs have hit record highs, demand is collapsing, and investors are walking away. According to the Financial Times, policymakers are now scrambling to figure out how to stop things from spiraling further.

Last week, 30-year bond yields hit 3.2%, up from 2.3% earlier this year. 40-year bond yields climbed to 3.7%, right after two auctions flopped in a row. Traders in Tokyo described it bluntly as a “buyers’ strike,” and it confirmed something deeper.

Investors no longer want Japan’s super-long-term debt. Yields shot up because prices tanked, and that’s happening for one big reason: nobody is buying.

Aging investors and the demand problem

A major reason for the weak demand is demographics. Kevin Zhao, who leads global sovereign and currency strategy at UBS Asset Management, said the country’s wealthy postwar baby boomers aren’t investing for the long term anymore.

Another chunk of missing demand is coming from life insurance firms. Last year, they were pushed to buy up long-term bonds, and they did. But traders now say that the buying wave has ended. Insurance companies aren’t reliable buyers anymore. They’re pulling back, and it’s showing up clearly in the auctions.

A recent 20-year bond auction barely attracted interest, the lowest demand since 2012. Then came this week’s 40-year bond sale, which had the weakest bid-to-cover ratio in nearly a year. Traders said the lack of interest confirmed what’s been building for months. The usual buyers are gone, and new ones haven’t stepped in.

BoJ policy changes and critical decisions ahead

The Bank of Japan (BoJ) is making things even tighter. It raised interest rates to 0.5% and has been trimming its bond buying by ¥400 billion — about $2.8 billion — each quarter. That tapering will continue until March 2026. 

But without strong buyers, every cut in BoJ purchases adds stress to the system. The bank already owns around 52% of Japan’s bond market, and there’s growing concern about how much more pressure the market can take.

All eyes are now on the week of June 16. That’s when the BoJ’s Monetary Policy Committee meets for two days. They’ll review the past year of reduced bond purchases. Some in the market believe the committee might slow down the tapering to keep a lid on yields. The BoJ’s decisions that week could decide whether things calm down or get worse.

Just after that, the Ministry of Finance is expected to meet with market players to discuss its debt issuance plans. One likely move would be to cut back on sales of long-dated bonds. Yields dropped slightly on Tuesday after reports that the ministry had started asking brokers how they feel about the current bond market environment.

At JPMorgan, economists told clients the spike in yields makes the upcoming BoJ meeting even more important. But Benjamin Shatil, a senior economist there, thinks the central bank is lagging behind. Japan is now in its fourth year of inflation above target, yet policies haven’t caught up. “It all begs the question — why buy?” Benjamin asked.

He also pointed to Japan’s Government Pension Investment Fund, which has not shifted allocations toward domestic bonds despite the volatility. And with liquidity tightening fast in Japan’s commercial banks, fewer institutions are able — or willing — to buy this debt.

On the trading desks in Tokyo, the long end of the bond market — the super-long JGBs — is flashing all the alarms. Shinichiro Kadota, a strategist at Barclays, said Wednesday’s failed auction shows the deep problems are now front and center.

Issues like BoJ tapering, budget pressure from defense spending, and household savings moving into tax-free NISA accounts are all hitting at the same time. Income for life insurers is also shrinking, and their investment products are losing out to other alternatives.

Shinichiro said he doesn’t expect the BoJ to reverse course. “There may be some tweaks . . . but the solution has to be the Ministry of Finance [reducing] issuance,” he said.

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