Japan reportedly considers issuing bonds with shorter maturities

(Bloomberg) — Japan’s Finance Ministry is considering shifting its bond issuance toward shorter maturities, according to a draft proposal seen by Bloomberg, a major shift as the central bank moves to scale back its debt purchases public.

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Finance Ministry officials have prepared a draft proposal that calls for increasing the proportion of bonds issued with shorter maturities. A group of experts is expected to approve the outline of the plan on Friday.

The move comes as the Bank of Japan’s decision to reduce its bond purchases encourages the government to seek new sources of financing. The BoJ held around 590 trillion yen ($3.7 trillion) in JGBs at the end of March, representing more than half of the total outstanding amount. There is a need to reduce the yield risk presented to the market by shortening maturities, according to the proposal, which also cites floating rate bonds as an option.

A shortening of the maturities of bond sales would represent a sharp change from the recent trend in which the ministry has tended to lengthen the maturities of the bonds it sells while the country’s key interest rates have remained around zero for decades and the BoJ used its yield curve control mechanism to cap long-term yields.

The BoJ ended the YCC in March, when it raised interest rates for the first time in 17 years. The bank announced last Friday that it would publish details of its plans to reduce its bond purchases after its next policy meeting on July 31. Before this disclosure, the bank meets with market participants to hear their points of view.

The Finance Ministry’s working draft, prepared in advance of a ministry meeting with market participants and experts on June 21, notes that shortening maturities would increase refinancing and interest risks for the government, and therefore recommends expanding the pool of government bond holders as much as possible.

The ministry sent a questionnaire to market participants, including potential bond buyers such as insurance companies, banks and foreign investors, during the panel’s last meeting in May. The ministry plans to publish the results of this investigation on Friday in addition to its proposal for future publication, the source said.

The banking sector could become an important new customer to replace the BOJ, said a respondent in the Finance Ministry survey. He suggests that the key to JGB management policy is to create an environment in which the banking sector can hold JGBs with confidence.

–With help from Sumio Ito.