Japan Slashes 2017 Bond Issuance By 5% In Implicit Boost To QE; First Reduction In 10Y JGBs Since 1998
Just days after raising its economic outlook, Japan’s ministry of finance announced on Thursday that for the first time since 1998 it would slash government bond issuance in fiscal 2017 which starts on April 1. The MOF plans to issue Y154.0 trillion in JGBs in coming fiscal year, down 5% from an initial Y162.2 trillion for the current fiscal year, as a result of sliding demand for debt amid continued very low to negative interest rates.
The JGB plans also feature a rare year-on-year cut in the issuance of 10-year JGBs: such a reduction is the first since fiscal 1998.
According to MarketNews, the government is also trying to reduce its dependence on debt issuance for financing a budget deficit for the third consecutive year. In fiscal 2017, it plans to meet rising social security and other costs by using funds set aside for currency market operations in the face of slow tax revenue growth.
Looking to capitalize on still record low , and in many cases negative, rates around the curve, the MOF will reduce the issuance of 20-, 10-, 5-, 2-, and 1-year debt while raising the share of 40-year bonds to take advantage of continued low bond yields caused by the Bank of Japan’s aggressive monetary easing, which has pushed some yields into negative territory. The amount of the JGBs to be sold to institutional investors through auctions in a calendar year will decrease for the fourth consecutive year in fiscal 2017 by Y5.8 trillion to Y141.2 trillion.
A partial breakdown of the shorter-end in proposed 2017 issuance:
- Y27.6 trillion of 10-year bonds, down from Y28.8 trillion in the current fiscal year;
- Y26.4 trillion in five-year notes, down from Y28.8 trillion in the current year;
- Y26.4 trillion in 2-year notes, down from Y27.6 trillion;
- Y23.8 trillion in 1-year bills; down from Y25.0 trillion.
- The ministry will also sell inflation-indexed 10-year bonds worth Y1.6 trillion, down from Y2.0 trillion in this fiscal year.
Additionally, the government will continue issuing more 40-year debt totaling Y3.0 trillion on a calendar year basis, up from Y2.4 trillion in the current year. The issuance of 30-year debt will be unchanged at Y9.6 trillion. Meanwhile, the MOF will decrease the sale of 20-year bonds to Y12.0 trillion in fiscal 2017 from Y13.2 trillion in fiscal 2016 in response to declining investor demand.
The ministry plans to auction liquidity-providing bonds worth Y10.8 trillion next fiscal year, up from Y9.6 trillion. These auctions are aimed at providing the market with additional bonds to cope with specific shortages.
While the ECB has been fighting with a lack of eligible collateral in recent months, which have sent the 2Y Bund to record low yields in a year-end scramble by banks to window dress their books, a similar problem has emerged for Japan, where massive asset purchases by the BOJ are “drying up the bond market” according to MNI. At the end of September, the BOJ held about 38% of Japan’s debt outstanding that has topped Y1 quadrillion (Y1,000 trillion), double of its GDP.
The MOF assumes an interest rate for fiscal 2017 of a record low 1.1%, down from 1.6% in the current year. It is based on the BOJ’s new policy framework under which it is trying to keep the 10-year Japanese government bond yield around zero percent. Indicatively, a 0.5% point drop in the assumed interest rate is estimated to trim borrowing costs by Y500 billion.
Some additional details of the proposed budget:
- The MOF will sell Y34.37 trillion in new bonds to finance the fiscal 2017 budget, down from this year’s initial plan to sell Y34.43 trillion. The issuance of JGBs to refinance maturing bonds will fall to Y106.1 trillion from Y109.1 trillion.
- Bonds issued to help rebuild Japan’s northeastern region hit by the 2011 earthquake will also decrease to Y1.5 trillion from Y2.2 trillion while bonds to finance the Fiscal Investment and Loans Program will fall to Y12.0 trillion from Y16.5 trillion.
What does this mean from a market standpoint?
Well, if nothing changes on the BOJ QE side, the 5% reduction in gross issuance means that, “all else equal” Japan’s QE just got a 5% boost as the BOJ will have Y8 trillion less primary issued bonds to monetize, leading to even greater purchases from private holders to offset the difference. Implicitly, it means an expansion of QE, not a taper as some have speculated.
Perhaps in confirmation of this, the USDJPY spiked on the report…
… while 10Y JGB yields have continued to decline:
The question is whether all else will be equal, or if Kuroda will take the hint from the MOF and at the next BOJ conference cut the amount of BOJ QE by a similar, if not greater, amount, especially if indeed the central bank is expecting faster growth and a pick up in global inflation.
Finally, with the ECB recently tapering as well, many have wondered if and when the BOJ will join the global tightening party. Today’s MOF announcement may be just the catalyst to get the ball rolling.