The Japanese yen weakened toward 144 per dollar on Tuesday, retreating sharply from recent four-week highs as domestic bond yields fell in response to reports that the Japanese government plans to scale back issuance of super-long bonds in an effort to curb upward pressure on yields.
Japanese yen tracks JGB yields lower
The shift in market dynamics came after Japan’s Ministry of Finance (MoF) signaled a potential revision to its bond issuance strategy for the current fiscal year, including prospective cuts to the supply of 20- and 40-year government bonds. The move followed a dismal 20-year bond auction last week, which recorded the weakest investor demand in over a decade, underscoring growing concerns about the long end of the yield curve and investor appetite for duration.
The expected cut in long-term bond issuance led to a decline in Japanese yields, particularly on the super-long end, as supply concerns eased. This, in turn, contributed to a broader rally in global fixed income markets, with U.S. Treasury yields also dipping amid a renewed bid for safe-haven assets and carry trades. Meanwhile, the dollar regained some ground as investors adjusted positions ahead of key U.S. economic data releases and central bank speeches later in the week.
Investor attention is now closely focused on the upcoming 40-year Japanese government bond auction, which will serve as a critical litmus test for market sentiment and the effectiveness of the MoF’s revised strategy. A weak result could further complicate the government’s fiscal planning and exert pressure on the Bank of Japan (BOJ) to maintain market stability amid tightening global conditions.
BoJ to adjust policy
At the same time, BoJ Governor Kazuo Ueda reaffirmed the central bank’s willingness to “adjust the degree of monetary easing as needed” to ensure inflation targets are sustainably achieved. In a recent statement, Ueda highlighted upside risks to core inflation, particularly from persistently high food prices and pass-through effects from past currency depreciation. His comments reinforced expectations that the BOJ could move further away from its ultra-loose policy stance, especially if inflation remains above target for a sustained period.
Still, the path ahead for the yen remains uncertain, caught between domestic monetary normalization and international yield differentials. With the BOJ treading cautiously and global central banks—especially the Federal Reserve—maintaining a hawkish bias, the yen could remain under pressure unless Japanese yields rebound or risk sentiment sharply deteriorates.
