The central bank has lifted its expectation for real GDP growth in the current fiscal year to 1.5%, up from the 1.3% level forecast in October last year. Efforts to boost inflation remain a concern, however, as the central bank struggles to reach its target of 2%.
But with the BoJ firm in its commitment to a negative interest rate policy while the US Federal Reserve starts to raise its own rates, global monetary policy is diverging, shaking up the investment outlook for buyers of government debt.
Japan’s Ministry of Finance is working hard to manage the impact of these market trends.
GlobalCapital spoke with Eiko Kimata, director for debt management and JGB investor relations at the ministry, in March to find out how investors are dealing with the central bank’s negative interest rate policy; how successful its efforts to improve liquidity in government bonds and attract international investors have been; and how it is approaching the funding environment during a period of global political volatility.
The calender based issuance to the market for the 2017 fiscal year is to be reduced by ¥5.8tr from the initial plan for FY2016.
The maturity structure of the Japanese government bond issuance plan for the 2017 fiscal year is designed to reflect investor demands appropriately, so that the current low interest rate situation is used without distorting the market.
We will increase the volume of super long-term bonds — combining auctions for 20, 30 and 40 year JGBs, as well as the Auction for Enchanced-Liquidity — by ¥0.6tr to reflect the demand we see from life insurance companies, among other investors.
Long term bond issuance, with a 10 year tenor, will be decreased by ¥1.2tr. Negative yielding short to medium term bonds, which include one year treasury bills, and two and five year JGBs, will be decreased by ¥4.8tr in total.
Since the quantitative and qualitative monetary easing policy was introduced in April 2013, we have seen domestic banks reducing their JGB holdings. Life insurance companies’ holdings have remained at the same level while the volume of JGBs held by foreign investors has increased.
We understand that under the low interest rate environment, domestic banks are increasing their holdings of JGBs with long maturities in pursuit of higher yields, and life insurance companies are extending their portfolio maturity from an asset-liability matching perspective. Meanwhile, foreign investors are increasing their T-Bill holdings to take advantage of the expansion of negative spreads in the dollar-yen basis swap.
According to the Flow of Funds published by the Bank of Japan, the share of foreign investors’ holdings in JGBs has gradually increased in recent years, and currently stands at 10.5% of the market, as at the end of December 2016.
The same share for T-Bills alone is 50.9%. This could be explained by the fact foreign investors can profit from combining purchases of short to medium term JGBs with a basis swap, given the widening negative spread of the yen basis swap.
The majority of foreign investors want to hold JGBs on a stable basis, such as central banks, pension funds and life insurance companies. JGB trades by investors, including foreign ones, with a variety of needs should prevent the market from flowing in one direction and this should have a stabilising effect on the market.
According to the balance of payments statistics, the top five countries that held the most JGBs at the end of the 2015 calendar year were Luxembourg (¥22.8tr), the US (¥21.4tr), the UK (¥11.3tr), France (¥9.5tr) and China (¥9.5tr). However, it should be noted that this is a classification by nationalities of holders including custodians, and so this might not necessarily match the distribution of end investors.
Maintaining and enhancing the liquidity of the JGB market is an issue that needs careful attention, because it contributes to minimising medium to long term financing costs.
The government is trying to secure market liquidity by arranging the issuance method of JGBs based on requests from market participants.
For example, there is strong market demand for improved liquidity in the super long term tenor, so we will increase the amount of auctions for enhanced liquidity.
In both the five to 15.5 year tenor and the 15.5-39 year tenor we will increase the amount of auctions by ¥0.6tr, meaning a total increase of ¥1.2tr.
We will continue to closely monitor developments in the market and pursue a JGB management policy in line with market needs and trends.
Fostering the inflation-linked bond market remains an important task, both to respond to changes in the market environment after overcoming deflation, and promoting diversification in the product characteristics of JGBs.
But given the limited expansion of the investor base, and a decline in secondary market liquidity due to the lack of buyers, there’s a demand-supply imbalance. In light of that, we have decided to lower the issuance amount per auction to ¥400bn, down from ¥500bn in April 2016. We are also conducting bimonthly buy-back auctions of ¥20bn to improve liquidity.
We have decided to maintain the current volume of index-linked issuance in the 2017 fiscal year JGB issuance plan, taking into account subsequent investor trends and the secondary market situation. But we will determine the size of issuance and buy-back operations in line with market needs and trends, to foster the inflation-linked market.
The Japanese economy is in a modest recovery, while delayed improvement can be seen in part. Business investment shows signs of picking up, and is expected to increase as corporate earnings improve.
We have achieved some structural reforms such as corporate governance reform and growth-oriented corporate tax reform. And as a result of executing reforms in various areas, the number of foreign tourists visiting Japan has reached a record high 20m following the relaxation of visa requirements for visitors from 15 countries. The retail electricity market has also been fully liberalised.
These are examples of progress in structural reform. The increase in the real growth rate in last year can be thought of as a consequence of these structural reforms.