A pedestrian walks past the Ministry of Finance building in Tokyo. The ministry is aiming to extend the average maturity of outstanding debt as Bank of Japan bond-buying stimulus keeps yields low.

Bloomberg
Tokyo

Japan’s government plans to reduce annual bond sales for the third year in a row, raising the prospect of zero yields on longer maturities in the world’s second-biggest debt market.
Investors will be offered ¥147tn ($1.2tn) of government securities in the year starting April 1, down from the ¥152.6tn plan for the current fiscal period, because of higher corporate tax revenues, the Ministry of Finance said. The ministry also aims to extend the average maturity of outstanding debt as Bank of Japan bond-buying stimulus keeps yields low.
“A reduction in issuance and steady foreign buying may depress yields to near zero for maturities up to around seven years, possibly intensifying demand for yields on longer tenors,” said Yuya Yamashita, a rates strategist in Tokyo at JPMorgan Chase & Co. “The curve is set to flatten. Depressed yields in shorter maturities will spill over to the longer end.”
Two-year yields slid to a record of minus 0.06% on Tuesday, while the 20-year yield fell below 1% to the least since January on Monday as the BoJ committed to buying longer-dated debt to achieve the 2% inflation target that it has been forced to delay. Sales of five- and two-year notes will drop by a total of ¥3.6tn from the previous year, issuance of 20-year debt will fall ¥1.2tn and 40-year debt sales will increase by ¥400bn.
Seven-year bonds yielded 0.074%, according to data compiled by Bloomberg. The benchmark 10-year yield was 0.28% on Thursday in Tokyo, according to Japan Bond Trading Co, the nation’s largest inter-dealer debt broker. JPMorgan’s Yamashita said the 10-year yield was unlikely to renew a record low of 0.195% hit in January unless the BoJ expands its monetary base target again.
Tapping investor appetite in longer-dated bonds will help ease tightness in shorter maturities where yields have faced strong downward pressure on demand from overseas investors taking advantage of cheap funding costs. It also matches the BoJ’s goal to lower interest rates across the curve.
Amid growing market concern about a limited availability of bonds the BoJ can buy to achieve its inflation target, the central bank announced operational changes under the current policy framework, including lengthening the average maturities of bonds it buys to as long as 12 years from the current limit of 10.
Liquidity in the $8.1tn bond market has dried up as the central bank cornered an unprecedented 30.3% of the market after implementing its unprecedented debt-buying stimulus more than 2 1/2 years ago. The BoJ now holds more of the country’s sovereign debt than any other class of investor, shrinking trading activity of JGBs and casting doubts on central bank Governor Haruhiko Kuroda’s contention that bond-buying stimulus has no limits.
Kuroda on Thursday told members of Japan’s largest business lobby group, Keidanren, that he wanted to “reiterate the bank’s unwavering determination to do whatever it takes to overcome deflation and achieve the price stability target of 2%.”
“I think they still have policies they can pursue” monetary easing, Chief Cabinet Secretary Yoshihide Suga said in an interview. “I am not at all pessimistic about this.” Total debt issuance next fiscal year, including new financing bonds, securities to replace maturing debt, and so- called zaito bonds sold for government agencies, will decrease to ¥162.2tn, from the initial plan of ¥170tn for fiscal 2015, according to the ministry.
The drop in planned debt offerings to the market is in line with the decline in the total issuance, while the reduction in the medium sectors was restrained to secure market stability, the ministry said in a document. It will also add a liquidity- enhancing facility for notes with remaining maturities of more than one year and less than 5 years.