Japan’s Ministry of Finance is set to discuss reducing issuance under its liquidity-enhancement auctions for medium-term government bonds at a meeting with primary dealers next week, according to two sources familiar with the matter.
The planned adjustment reflects improving supply-demand conditions in the government bond market following the Bank of Japan’s successive reductions in bond purchases, diminishing the need for additional supply, said the sources, who declined to be identified as the matter is private.
Introduced in 2006, liquidity-enhancement auctions are designed to boost market liquidity by reopening and issuing additional amounts of bonds that have become scarce in the secondary market.
The mechanism has been used to alleviate shortages in issues, some of which the BOJ at times held close to 90 percent.
The ministry is reviewing issuance of maturities in the 5-to-11-year sector as shortages of “cheapest-to-deliver” bonds, a key reference issue in the JGB futures market, have eased, reducing the need for additional supply, the sources said.
The ministry declined to comment.
Market participants have called for a reduction in issuance in the sector for the October-December quarter, one of three maturity zones covered by liquidity-enhancement auctions.
Issuance amounts under the programme are reviewed every three months. For the July-September quarter, liquidity-enhancement issuance in the 5-to-11-year sector was set at 650 billion yen (HK$32.29 billion) per month.
Depending on the size of any reduction, the move could also help curb the rapid rise in longer-term interest rates by limiting bond supply.
If implemented, it would mark the first reduction in liquidity-enhancement issuance for the 5-to-11-year sector since the current framework was introduced in April 2026.
The ministry is expected to decide issuance amounts later this month, after consulting market participants at the meeting.
Reuters
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