By playing Kihara
TOKYO (Reuters) - Talk about massive fiscal spending and subsequent surges in ultra-long yields, which raises questions about how quickly Japanese banks can gradually reduce their bond purchases, adding to the challenges it faces in eliminating its huge monetary stimulus.
Analysts and sources familiar with central bank thinking say that while sheds are unlikely to increase bond purchases, the rise in ultra-long yields may affect its decision on the speed and composition of future quantitative tightening (QT) (QT).
"The curve control of the earnings curve was abandoned last year, and long-term interest rates are no longer a monetary policy tool for sheds," one of the sources said. "The key is whether the rise in ultra-long rates will affect production in other mature areas."
Yields on Super Japan Government Bonds (JGBs) have steadily risen since April, with 40-year yields hitting a record 3.445% on Thursday, even as yields remain stable on other maturity days.
While the rise was partly due to reduced demand for life insurance companies, it also reflected market expectations for a worsening fiscal in Japan as lawmakers escalated the mass elections before demanding huge spending and cutting tax cuts.
"Investor concerns about Japan's fiscal concerns are super bonds. In the past, this has weakened liquidity and caused market distortions," said Katsutoshi Inadome, senior strategist at Asset Management at Sumitomo Mitsui Trust.
While BOJ's QT plan is unlikely to directly affect its ride speed path, a surge in bond yields could hurt business confidence and make it more difficult for the public to convince the public to increase the cost of short-term lending.
BoJ has experienced a market crash at a delicate moment, which will be reviewed at next month’s policy meeting until March, and has proposed the bond taper plan for April 2026.
Under current plans set out last year, sheds have slowed bond purchases by about 400 billion yen ($2.74 billion) by March 2026, a rate that will reduce the bank's $390 million balance sheet to up to 8%.
Next week, the shed will consult with banks, insurance companies and other market participants to understand their views on the dwindling pace. These findings will serve as the basis for the Board to make a decision on the QT program during its June 16-17 review.
No quick fix
The QT program is a crucial part of the central bank’s strategy, where decades of hyper-floating monetary policy integrate the economy.
After a fairly smooth start with the end of negative and bond yield controls last year, U.S. President Donald Trump's tariffs have undermined its policy normalization, which is expected to result in short-term interest rates from 0.5%.
Many analysts do not expect central banks to change their current QT plans and roughly maintain or slightly slow down the gradual decline in fiscal 2026 to avoid rising markets.
The recent surge in ultra-long bond yields could attract calls from market participants asking Boj to fine-tune the composition of the bonds he purchased. This could also prevent sheds from pursuing faster tapers in future QT plans, analysts say.
According to a summary of comments at the meeting from April 30 to May 1, a board member said that sheds must pay attention to each expired liquidity condition during the June QT review.
Another source said, “The barrier to changing the current taper size is very high, although the rise in extra-long volumes may affect discussions about future QT plans.
As with existing QT plans, the new plan extending beyond April will seek to provide market predictability for the reduction, while giving sheds some flexibility in adjusting purchases, sources said.
Analysts say it could be tricky if market distortion persists, or leads to a wider bond sell-off due to market declines to Japan's finances.
Although Prime Minister Shigeru Ishiba rejected calls for lowering the consumption tax rate, he is under pressure to compile new spending plans within the party - a move that will increase Japan's huge public debt.
Mari Iwashita, executive expense strategist at Nomura Securities, pointed out that structural factors could make bond markets fragile, such as the decline in the presence of Boj, a weakened appetite for ultra-long bonds, and a political overreliance on fiscal spending.
“This structural factor is irreversible, not a problem that a shed can solve,” she said.
($1 = 146.1700 yen)
(Reported by Leika Kihara; other reports by Gosukko Wada and Kevin Buckland; Editors by Sam Holmes)