The Japanese government bond market has experienced panic-driven selling, with the Bank of Japan's policy meeting concluding this Friday. The central bank may initiate bond-buying interventions, yet exiting its asset purchase program and the pressure on the yen exchange rate pose significant obstacles. Beyond this, what other options do policymakers have? Long regarded as a stable store of value, Japanese Government Bonds (JGBs) have recently seen violent fluctuations that have left investors unsettled. Japanese Prime Minister Sanae Takaichi's announcement of an early general election and a pledge for tax cuts sparked market concerns over Japan's fiscal health, driving the 30-year JGB yield to surge a staggering 27 basis points in a single day on Tuesday, reaching a historic peak of 3.88%. The 40-year bond yield unprecedentedly breached the 4% threshold. Japan's Finance Minister called for market calm, leading to a subsequent pullback in bond yields from their highs. However, market sentiment remains panicked, trading is thin, and many investors are choosing to exit the market and wait on the sidelines. The following are several market stabilization measures available to Japanese policymakers: **Intervene by Buying Bonds** The Bank of Japan (BOJ), which concludes its two-day monetary policy meeting on Friday, has a mandate to ensure financial stability. It could opt to temporarily or regularly enter the market to purchase government bonds, an operation that would push bond prices higher—bond prices move inversely to yields. Prior to 2024, under its Yield Curve Control (YCC) framework, the BOJ was a massive net buyer of JGBs to maintain low interest rates. At that time, the central bank held over half of the total JGB market. It is now attempting to gradually reduce its holdings by scaling back its purchase amounts. However, the threshold for the BOJ to intervene directly might be exceptionally high: on one hand, the bank has been trying for years to exit the bond market; on the other hand, any measure that sets a cap on yields could exert further downward pressure on the yen, which is already languishing near four-decade lows. **Delay the Reduction of Bond Purchases** According to a plan introduced in July 2024, the BOJ was originally set to reduce its monthly bond purchases by a further 400 billion yen (approximately $25 billion) each quarter. Last year, due to heightened trade and geopolitical risks, the BOJ decided to proceed more cautiously with this plan and announced that, starting from April 2026, the quarterly reduction amount would be lowered to 200 billion yen. The BOJ could choose to postpone this next phase of the reduction plan, an idea also floated this week by opposition leader and former Ministry of Finance official Yuichiro Tamaki. Ian Samson, a multi-asset portfolio manager at Fidelity International, stated, "Sooner or later, the market will question whether the BOJ can continue to reduce its bond holdings." It is noteworthy that this measure could also potentially weigh on the yen exchange rate. **Implement a Twist Operation** Although JGBs of all maturities have faced selling pressure recently, the decline in long-term bonds has been most pronounced—investors are demanding higher returns to hold long-dated debt, pushing up yields at the long end and causing the yield curve to steepen. The BOJ could emulate the U.S. Federal Reserve by implementing a localized version of "Operation Twist." This strategy was first used by the Fed in the 1960s and revived in 2011; it involves selling short-term government bonds and using the proceeds to buy long-term bonds. **Reduce Government Bond Issuance** Japan's ultra-long-term bonds are traditionally absorbed by institutional investors like life insurance companies, but the overall demand from these investors is on a declining trend. The Japanese government could choose to scale back the size of its bond auctions in an attempt to rebalance market supply and demand. Between May and June of last year, long-term JGB auctions encountered weak demand, prompting Japan's Ministry of Finance to subsequently reduce issuance sizes. Furthermore, when formulating the latest fiscal budget, the government reduced its reliance on ultra-long-term bonds, planning the smallest issuance of such debt in 17 years. **Adjust the Asset Allocation of the Government Pension Investment Fund (GPIF)** The Government Pension Investment Fund (GPIF) is the world's largest public pension fund, managing assets of approximately 260 trillion yen. Brent Donnelly, President of Spectra Markets Research and Foreign Exchange Advisory, commented, "The fund currently holds about $400 billion in foreign bonds. An adjustment to its asset allocation would send a powerful signal that Japanese capital is starting to flow back home." "This move would simultaneously provide a massive boost to both JGBs and the yen... Therefore, if the GPIF were to make such an announcement, investors should act swiftly. Long-term investors would follow suit, and this trend could potentially last for a year or even longer."
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