Super-long Government Bonds: Interest Rate Increases a Warning against Shaky Fiscal Discipline

Editorial

16:06 JST, June 27, 2025

Interest rates on super-long government bonds are climbing. This is probably because the increase in government bond issuance due to deteriorating fiscal conditions is causing a rising sense of caution among more investors who believe it is difficult for them to purchase such bonds.

In order to attempt to stabilize the government bond market and ensure smooth borrowing, it is important for the government to work on fiscal consolidation. The Bank of Japan also needs to make efforts to manage its policies with market stability in mind.

On June 23, the Finance Ministry revised its government bond issuance plan for this fiscal year. The issuance of super-long government bonds with maturity terms of 20, 30 and 40 years will be reduced by ¥3.2 trillion to a total of ¥21.4 trillion.

The government bond issuance plan is formulated in conjunction with the budget compilation at the end of each year. It has maintained that an excessive response to temporary price fluctuations is undesirable in consideration of market stability.

The revision was made independently from a budget compilation for the first time in 16 years, since 2009, an unusual move. This is likely because the ministry judged that structural changes were occurring in the market.

When the number of buyers for government bonds declines and their prices fall, interest rates rise in response. The distribution yield on 40-year government bonds was 2.66% at the beginning of the year but climbed to a record high of 3.675% in May.

Behind the shortage of buyers is the situation of those who buy super-long government bonds.

Following changes in international rules, life insurance companies, which are the main buyers of super-long bonds, had increased their purchases of bonds matching the length of their insurance policies, but this demand has now subsided.

In addition to this, the domestic political situation has also had an impact. The growing debate on consumption tax rate cuts has given rise to the view that fiscal consolidation will become more distant. For that reason, the demand for super-long bonds has decreased, causing their interest rates to rise from this spring.

Super-long bonds are said to reflect concerns about fiscal policy sensitively. The government and the ruling and opposition parties should take seriously the warning bells being rung by the market.

The environment surrounding government bonds also is changing. This is because the BOJ changed its large-scale monetary easing policy in March 2024 and “life with interest rates” has arrived. As a result, the burden of interest payment costs will increase.

It can be said that the era in which the central government can borrow money without much concern for interest rate levels is now over.

The BOJ also decided this month on a new government bond purchase plan. It has been gradually reducing the amount it purchases, but the pace of its reduction in purchases will be slowed down from April 2026. The central bank has shown consideration for the unstable market, which has seen raising interest rates, among other things.

The BOJ purchases not only super-long bonds but also others including ones with 10-year and two-year terms. It holds about 50% of outstanding government bonds, at over ¥500 trillion, and has a significant impact on the market as a whole.

It is important for the government and the BOJ to try to communicate carefully.

(From The Yomiuri Shimbun, June 27, 2025)