Key insights
- Japan is considering reducing buybacks of inflation-linked government bonds due to increased investor demand amid rising inflation expectations. This could signal a shift in the BOJ's approach to managing inflation and bond yields, potentially impacting global bond markets. However, the direct impact on US equities is limited, as the effect is primarily contained within the Japanese bond market.
TOKYO, March 23 (Reuters) - Japan is considering a reduction in buybacks of inflation-linked government bonds as investor demand swells amid rising inflation expectations, two sources familiar with the matter said on Monday.
In late January, market-based inflation expectations, measured by the break-even inflation rate, topped 1.9% for the first time, making inflation-linked bonds attractive to investors.
Inflation-linked bonds are securities designed to help protect investors from inflation, with principal and interest payments moving in line with the rate of consumer price growth.
Against that backdrop, the finance ministry is weighing a plan to cut its buyback amounts, with purchases of 15 billion yen ($94.11 million) each planned for April and June, said the sources, who declined to be identified as the matter is private.
The ministry is expected to consult market participants on the proposal in the near future, the sources said.
The proposed buybacks would mark a sharp reduction from recent levels. The government bought back 20 billion yen of inflation-linked bonds in each of January, February and March, meaning the planned amounts for the April–June period would be roughly half those of the previous quarter.
The issuance volume itself, however, is likely to remain unchanged at 250 billion yen for May, with a final decision expected later this month, the sources said.
Inflation expectations in Japan have been rising before the Middle East war, which has further added to the price momentum globally.
Japan introduced inflation-linked bonds in 2004 but was forced to halt issuance in 2008, when deflation raised the risk of losses on principal. Issuance resumed in 2013 as then-Prime Minister Shinzo Abe stepped up efforts to pull the economy out of deflation.
Since restarting issuance, the government has sought to nurture the market by guaranteeing principal and continuing with its buybacks.
While the supply-demand gap based on the latest gross domestic product data has turned positive for the first time in two quarters, a full-fledged recovery in demand remains some way off, economists say.
($1 = 159.3900 yen)