For years, Japan’s enormous government bond market has slumbered on the edges of global finance. Ruled by the country’s central bank, prices rarely budge, leaving traders with little to do.
But at the start of this month, a sale of 10-year debt failed to stir the typical interest from investors in the ¥1.1 quadrillion ($10.3tn) market. Unsettled by new plans at the central bank to shift to buying more shorter-term debt, some private buyers maintained their distance, making it the worst auction in terms of demand since 2016. Japanese government bonds, JGBs, stumbled, sending ripples through other markets including US Treasuries and also, briefly, UK gilts. Behind the decrease in demand was a rethink by economists and investors about the next steps for the Bank of Japan ahead of its meeting on October 31, as policymakers worry about the health of the global and domestic economy. “JGBs remain in the eye of the storm and will continue to influence the direction of global rates,” said Priya Misra, head of global rates strategy at TD Securities. Poor economic data and a increase in the country’s consumption tax are likely to keep upholding up debt prices, she said. Still, the lackluster auction on October 1 reflected anticipations that the BoJ could pull back more forcefully on its substantial purchases of long-term JGBs, which have underpinned the past six years of market action. Its aim is to push long-term debt yields further above short-term interest rates — an effect known as steepening the yield curve that is vital to the health of the country’s banking system and the returns of its massive public-sector pension fund.
Some economists fear that the tax increase could be burdensome enough to push the world’s third-biggest economy into a technical recession. Speculation that the central bank would restart stimulus strengthened last week, when the BoJ raised its purchase target for short-term JGBs while cutting its scheduled purchases for longer-dated notes, a move evidently aimed at steepening the yield curve.