Insights 
VT 
Japan is contemplating a buyback of certain super-long government bonds issued at low interest rates. This consideration arises as the country also evaluates reducing the issuance of these bonds due to a recent sharp increase in yields.
The Ministry of Finance is collaborating with the Bank of Japan, which is reassessing its tapering plans for the following year. Effective measures necessitate alignment with the government’s fiscal strategies to manage Japan’s large public debt.
government bond buybacks
The Japanese government is weighing the option of purchasing back ultra-long-term bonds—those with maturities extending over 30 years or more—that were initially sold during an extended period of low interest rates. The aim here appears to be twofold: first, to reduce the burden of servicing debt issued under older, less favourable terms when measured against the current market environment; and second, to manage the supply side by cutting back fresh issuance of similar debt instruments.
The yield curve has steepened noticeably in recent weeks, particularly at the long end, following a period in which interest rates remained anchored near zero. This shift places new pressure on existing bondholders and raises borrowing costs for the government. By engaging in buybacks of bonds with low coupons, the authorities may hope to reduce distortion in the secondary market and potentially reprice segments of the curve more in line with prevailing macroeconomic conditions.
Simultaneously, the Ministry of Finance has been working closely with the central bank. Ueda, the central bank’s governor, is known to be in the process of rethinking how quickly to withdraw support previously embedded in its asset-purchase programmes. Such coordination would not be undertaken lightly, but it’s important. When debt levels reach the kinds of extremes seen in Japan, even minor fluctuations in long-term rates can affect fiscal flexibility.
implications for traders and risk management
We understand the implication clearly: yields rising too abruptly may disrupt refinancing operations and crowd out spending elsewhere. Authorities appear mindful of that and are adjusting in anticipation. For us, this means that the term premium embedded in these ultra-long JGBs might compress from current levels, especially if buybacks are executed systematically and with clear forward guidance.
For those trading derivatives linked to Japanese rates, particularly swaps and swaptions, shorting duration at the longer end may become less favourable. Adjusted expectations for volatility and rate move probabilities would suggest positioning slightly more defensively around 20- to 40-year tenors. We have already observed a modest bid return to payer swaptions at long expiries, which could be participants beginning to price in more two-way risk.
From a risk management perspective, positioning in the belly of the curve may offer better relative value than taking outright long exposure at the longest durations, which may now carry greater policy sensitivity than previously assumed. We favour expressions that are moderately convex, given that the range of policy responses remains uncertain in timing but clear in direction.
Ito, a member of the budgetary committee, recently remarked that debt sustainability cannot rest only on rate suppression. That suggests decision-makers are not locked into old approaches but are instead adapting to both market movement and broader macro pressures. It’s this flexibility that should be watched closely.
What matters over the next few weeks is how the ministry sequences communication with investors—particularly how it signals the cadence of those potential buybacks. If coordinated effectively with upcoming issuance calendars and supply targets, the curve may find some renewed stability. Traders should calibrate exposures with this end in mind, especially given how susceptible liquidity at the long end has become to even light shifts in sentiment.
