Japan will increase government bond issuance to the market this fiscal year by 2.1 trillion yen ($23.08 billion) to 132.3 trillion yen, the Ministry of Finance said on Friday, at a time when investors are bracing for further rises to debt issuance to cover an expected tax revenue shortfall.
The MOF decided to reallocate some of the issuance originally intended for retail investors to the institutional market because of weak retail demand, a ministry official said. In addition to the reallocation announced on Friday, market players are bracing for the MOF to increase JGB issuance to the market by another 6 trillion yen or so this fiscal year to offset the tax revenue shortfall.
Yields on JGBs seemed to be too low to attract active buying by retail investors, a MOF official said. "From the standpoint of levels of interest rates, retail investors may not be looking at them as attractive products," the MOF official told reporters, referring to JGBs tailored for retail investors. "They are not selling in the amounts that we had expected," he added.
The MOF has also cancelled plans to issue 300 billion yen of 15-year floating rate JGBs and another 300 billion yen in inflation-indexed 10-year JGBs this fiscal year, and will increase market issuance in other types of JGBs instead. But the MOF remains committed to these instruments and does not rule out issuing them again in the future, the ministry official said.
The MOF said it would increase monthly 10-year JGB issuance by 100 billion yen to 2.2 trillion yen starting in December. The ministry also said it would increase monthly issuance of two-year JGBs starting in December, while raising the monthly issuance of five-year JGBs and one-year treasury bills starting in November.
The scope of the planned increase and the reallocation away from floating-rate and inflation-indexed JGBs was in line with market expectations as the MOF had held discussions on such changes earlier this month. The method of reallocation is also unlikely to surprise the market, since the MOF and market players had already discussed the possibility of increasing issuance in one-, two-, five- or 10-year JGBs to cope with the factors such as weak retail demand.
The benchmark 10-year JGB yield has risen 11 basis points this month, on track for its biggest monthly rise since May 2008, partly due to uncertainty about the size and details of debt issuance for this fiscal year and next. In addition to the potential for further increases to debt issuance to offset the expected tax revenue shortfall, investors are also jittery about what the size of JGB market issuance may be in the next fiscal year that starts next April, and such uncertainly could weigh on JGBs in coming months.