Japan is set to launch a new floating-rate note designed to shield investors from the impact of increasing bond yields, according to two government insiders who spoke to Reuters. This development indicates that policymakers are preparing for additional interest rate increases. The initiative is aimed at facilitating the smooth sale of government debt, despite the Bank of Japan (BOJ) reducing its substantial bond purchases and considering further hikes to near-zero interest rates. Both the reduction in bond purchases and rate hikes by the central bank contribute to lowering bond prices and increasing yields, given the inverse relationship between interest rates and bond prices.
The new note will feature a short-term duration and a floating interest rate that adjusts in line with market rates, as disclosed by the anonymous sources who are not authorized to speak publicly. This floating rate is intended to minimize potential losses for investors in the event of a BOJ rate hike, thereby maintaining the attractiveness of bonds as an investment option for banks. Currently, most government bonds in Japan and other countries have fixed rates closely linked to the cash rate at the time of issuance. Due to the BOJ's extended ultra-loose monetary policy, the existing stock of bonds offers very low yields.
The government plans to issue this new note starting from fiscal 2026, with two- and five-year bonds being considered as potential options. Further details, including the maturity of the bonds, the amount to be raised from the issuance, and the frequency of adjusting the floating rate, will be determined following discussions with private investors, according to the sources. The Ministry of Finance, which manages Japan's debt policy, did not respond to requests for comment. Although the government has previously issued floating-rate notes with a 15-year maturity, this marks the first time it will offer floating-rate notes with short-term durations, which are more susceptible to fluctuations due to central bank policy changes.
In March, the BOJ terminated negative interest rates and other elements of its aggressive monetary stimulus, marking a significant departure from its decade-long, ultra-loose monetary policy. Governor Kazuo Ueda has hinted at the possibility of further increasing short-term interest rates. Additionally, the BOJ is expected to release a detailed plan this month outlining how it will reduce its substantial bond purchases and shrink its nearly $5 trillion balance sheet. Any increase in Japanese government bond (JGB) yields would raise the cost of financing Japan's rapidly expanding public debt, which, at twice the size of its economy, is the largest among major economies.
