Bank of Japan's rate hike and fiscal anxiety intertwine; 30-year government bond auction faces lukewarm response

Japan’s long-term government bond market is facing multiple pressures. The results of the 30-year government bond auction this Thursday reflect a significant decline in market participation, with the bid-to-cover ratio at only 3.14, a sharp drop from the previous auction’s 4.045 and below the past year’s average of 3.405. The tail spread widened to 0.15, up from 0.09 last month, indicating a series of data changes that suggest institutional investors’ enthusiasm is waning.

The Tug of War Between Fiscal and Monetary Policies

Fiscal concerns are becoming the main factor suppressing investor confidence. Japan’s current fiscal situation is increasingly complex, compounded by market expectations adjustments regarding the rate hike path, which have pushed up long-term yields. To address this situation, the Ministry of Finance announced it will reduce the issuance scale of ultra-long-term government bonds in the new fiscal year starting in April. This move aims to ease the pressure on primary dealers but also reflects policy-makers’ helpless acknowledgment of weak market demand.

Contradiction Between Central Bank Policy and Yen Movement

In December, the Bank of Japan raised its policy interest rate to a thirty-year high, originally intending to stabilize prices and support the yen through tightening policies. However, market reality contradicts the initial policy intent— the yen continues to weaken, and downward pressure on the exchange rate persists. This contradiction has sparked market speculation that the central bank may need to implement more aggressive measures to address the dual goals of inflation control and exchange rate stabilization.

The subdued demand in this government bond auction essentially reflects investors’ cautious attitude toward Japan’s economic policy outlook.