UBS Economics-Japan Economic Perspectives _JGBs, BoJs QT, and consumption...

ab12 June 2025Global ResearchJapan Economic Perspectives JGBs, BoJ's QT, and consumption tax debate Why have super long JGB yields surged? Direct reason reflects lower demand from lifers; 48% of bond investors cite lack of buyers. However, concerns regarding fiscal sustainability amid high inflation are influencing Japan's bond markets. The political debate on cutting the consumption tax rate from the current 10% is a symbol of the concern regarding fiscal discipline. That said, the MoF is likely to reduce super-long bond issuances to stabilize yields. We do not think the yields will surge further at this stage barring unexpected slide in politics toward fiscal expansion. Will the BoJ adjusts QT? UBS expects the current pace of bond purchase reduction to continue beyond Q2 2026, but media reports suggest a lesser reduction. We are not fully convinced, but we are not surprised that the BoJ prefers to avoid noise in both financial markets and politics regarding its policy normalization. Once consensus is established, we expect the Bank's actions to not be too different to what the market expects. Will the consumption tax (VAT) be cut? Ahead of the July Upper House election, opposition parties propose VAT reductions to alleviate inflationary pressures on households. The LDP opposes these cuts, citing fiscal responsibility and the importance of VAT revenue for welfare support. In our view, a consumption tax rate cut amid rising long-term yields may lead to market instability similar to the UK's Truss shock. The LDP's stability is likely to hinder a VAT cut, but current polls indicate mixed public sentiment on VAT.Japan faces increasing fiscal demands amid geopolitical shifts and demographic challenges, necessitating balanced fiscal reform discussions.This report has been prepared by UBS Securities Japan Co., Ltd.. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES, including information on the Quantitative Research Review published by UBS, begin on page 7. EconomicsJapanMasamichi AdachiEconomist masamichi.adachi@ubs.com +81-3-5208 6214Go KuriharaAssociate Economist go.kurihara@ubs.com +81-3-5293 3000 Japan Economic Perspectives 12 June 2025ab 2Super long JGB yields hit record high Yields of so-called "super long-term bonds," with maturities over 10 years (specifically 20, 30, and 40 years), rose notably over the last couple of weeks. Indeed, the 30-yr bond yield rose 45bps in a month, reaching 3.19% on 21 May, a record high since 1999 when the issuance began, while the 40-yr yield rose 56bps, reaching 3.68%, also a record high since 1999. The 10-yr bond yield (so-called "long-term bond," a benchmark for long-term interest rates) also rose, but to a lesser extent (26bps).While the trigger of the surge in yields appeared to be technical trades, such as the unwinding of flattening positions and higher volatility, the key reason was lower demand from life insurance companies (lifers), which are the main buyers of super long bonds. They have bee