Japan's 30-year bond hits a record

Yields on 30-year Japanese government bonds hit a record high as Tokyo's bond market sold off again. The main reason is on the buying side. Japan's big life insurers are no longer taking up the long end.

How the anchor came loose

For most of the past decade the Bank of Japan held long-term yields down by buying bonds in enormous quantities and, under its yield-curve control policy, capping the ten-year yield near zero. That era ended in March 2024, when the bank scrapped negative interest rates and yield-curve control together. Later that year it began gradually reducing its monthly bond purchases, and in December it raised its policy rate to 0.75 per cent, the highest in three decades. The central bank still owns roughly half of all government bonds, but it is now a shrinking buyer rather than a backstop.

The government has added to the supply pressure. Prime Minister Sanae Takaichi, who took office in October, has favoured expansionary fiscal policy, and her government approved a large supplementary budget in the autumn. Markets have taken that as a sign that borrowing will stay high even as the central bank steps back. Inflation has run above the bank's 2 per cent target for more than three years, which removes the old argument that deflation would keep yields low regardless.

Insurers step back

For decades Japan's life insurers bought super-long JGBs almost regardless of price, taking 30-year and 40-year paper to match their long-dated obligations to policyholders. Rising yields across the curve have left them sitting on large paper losses on older, low-yielding holdings. Solvency ratios and capital rules limit how much more they can take, and they have cut back sharply on new long-dated purchases.

A regulatory change sharpened the shift. Japan is moving to an economic-value-based solvency regime for insurers, which measures assets and liabilities at market value and penalises mismatches between the duration of an insurer's bonds and the duration of its policies. In the years before the new rules, the large insurers bought super-long bonds heavily to close those gaps. Having largely done so, they have less reason to keep buying, and the demand that once absorbed each new 30-year and 40-year issue has thinned.

The losses on old holdings matter too. A bond bought years ago at a yield below 1 per cent is worth far less now that new bonds of similar maturity pay much more. Insurers can hold such bonds to maturity without realising the loss, but the paper losses weigh on capital measures and on their willingness to add risk. Buying more long bonds means adding more of the asset that has already hurt them.

Weak auctions, steeper curve

Without the insurers, the Ministry of Finance's super-long auctions have repeatedly tailed and drawn thin demand. The steeper curve that results could strain domestic bank balance sheets and raise the government's long-term interest bill considerably.

The ministry has already tried to respond. After a string of weak auctions last spring, including a 20-year sale that drew the weakest demand in decades, it trimmed planned issuance of super-long bonds and shifted more borrowing to shorter maturities. That eases pressure on the long end but increases the amount of debt that must be refinanced frequently, which exposes the budget more quickly to higher short-term rates as the Bank of Japan raises them.

Lessons from earlier bond shocks

Japan has seen sudden sell-offs before. In the value-at-risk shock of 2003, a jump in volatility forced banks' risk models to cut bond holdings, and the ten-year yield rose several-fold within a few months before stabilising. Britain's gilt crisis in 2022 offers a different warning: there, leveraged pension-fund strategies turned a rise in long yields into forced selling, and the Bank of England had to intervene. Japan's insurers are not leveraged in that way, which makes a disorderly spiral less likely, but both episodes show how quickly the long end can move when a large class of buyers is forced or inclined to step back.

The case against alarm

A reasonable objection is that higher yields in Japan are a return to normal rather than a crisis. With inflation above 2 per cent, real long-term yields remain low by international standards. Around nine-tenths of government bonds are held at home, which reduces the risk of a sudden foreign exit. Higher yields also help savers, pension funds and insurers themselves on new money, and they give banks a better return on deposits.

All of that is true, and it explains why the sell-off has been steady rather than chaotic. It does not remove the fiscal arithmetic. Japan's government debt is well above twice the size of its economy, the largest ratio among rich countries, so each rise in the average borrowing rate adds more to interest costs than it would almost anywhere else. The risk is not a sudden crisis but a slow squeeze on the budget.

Ripples beyond Tokyo

Japanese investors are the largest foreign holders of American Treasuries and big owners of European bonds. As domestic long yields rise, the incentive to keep money abroad, especially after the cost of hedging the currency, weakens. A gradual repatriation of Japanese savings would add upward pressure to long-term yields in America and Europe, where governments are also borrowing heavily.

What to watch

The results of the next 30-year and 40-year auctions will show whether demand is stabilising. The Bank of Japan's policy meetings will show how fast it intends to raise rates further, and its planned review of the bond-purchase reduction will show whether it is willing to slow the taper if the long end becomes disorderly. Life insurers publish their investment plans for the new fiscal year in April, and those will reveal whether they intend to return to the super-long market.

Record 30-year yields show that Japan's life insurers can no longer soak up the government's long-dated debt. Tokyo should expect to pay more to borrow for years to come, and the finance ministry is likely to shift more issuance towards shorter maturities in the coming fiscal year, trading lower long-end pressure for greater exposure to the Bank of Japan's rate rises.