In recent years, Japan's bond market has developed a structure heavily reliant on government bonds. According to CEIC data, as of the end of July 2024, the scale of Japan's bond market reached 1,387 trillion yen (approximately $13.3 trillion), making it the third-largest bond market in the world after the United States and China. However, influenced by an aging population and sluggish economic growth, the Japanese government has continuously increased leverage, driving up the issuance scale of government bonds, resulting in public bonds accounting for a high proportion of 92.4% in Japan's bond market.
Breaking it down further, Japan's bond market is primarily dominated by public bonds, accounting for 83.5%, with the balance of Japanese government bonds at 1,158 trillion yen, and other bonds such as municipal bonds and government-guaranteed bonds having quite low proportions. Corporate bonds, bank bonds, and samurai bonds have relatively small market shares, reflecting weak corporate financing demand. Since the implementation of the negative interest rate policy in 2016, the Japanese government has more frequently issued long-term government bonds to extend repayment pressure, further solidifying the dominance of government bonds in the market.
The Bank of Japan, as the "super buyer" of Japanese government bonds, has been continuously purchasing government bonds since the massive quantitative easing policy was implemented in 2013. The data shows that as of the end of July 2024, the scale of Japanese government bonds held by the Bank of Japan reached 581 trillion yen, accounting for 50.2% of the total market. The massive holdings by the Bank of Japan have weakened the liquidity of the secondary market for government bonds, significantly reducing trading activity and making the structural imbalance in the market increasingly apparent.
To address the long-term economic stagnation, the Japanese government and the central bank have for years adopted a model that combines active fiscal policy and loose monetary policy, which, while alleviating fiscal pressure in the short term, also brings the risk of deficit monetization. The large issuance of low or even negative interest rate government bonds lacks market constraints, further exacerbating the structural imbalance of the bond market. The Bank of Japan's unconventional bond-buying model has caused the proportion of government bonds in Japan's bond market to climb further, raising concerns over liquidity and long-term stability in the market.
