Japan Government Bond Market Liquidity Plunges to Record Low as Super-Long Yields Surge

Japan's government bond market faced unprecedented liquidity challenges as selling pressure intensified, with key indicators reaching record levels that highlight fundamental structural changes in the market.

JGB Liquidity Index Reaches All-Time High

The JGB Liquidity Index, which measures how much JGB yields deviate from levels expected under normal liquidity conditions, reached a record high on Tuesday. This metric has been gradually increasing since early last year when JGB market volatility began rising due to growing fiscal concerns. The index surge reflects what market observers describe as a buyers' strike that has contributed to dramatic yield movements.

Super-Long Bond Yields Surge Dramatically

Japan's bond market experienced significant volatility following Prime Minister Sanae Takaichi's election commitment to reduce food taxes. The policy announcement exposed underlying market vulnerabilities and triggered substantial yield movements across the curve.

US Treasury Secretary Scott Bessent acknowledged the global implications, stating he had spoken with Finance Minister Satsuki Katayama about the situation. Katayama responded by urging market players to exercise calm as the volatility began impacting the Treasury market.

Record Insurance Company Bond Sales

According to Japan Securities Dealers Association data, Japanese insurers sold a record number of super-long bonds last month. This unprecedented selling activity has raised concerns about market stability and the availability of natural buyers to absorb continued selling pressure. The worry extends beyond current high yield levels to questions about market capacity to handle future volatility without adequate buyer support.

Foreign Investment Dominance Transforms Market Structure

The composition of Japan's bond market has undergone a dramatic transformation over the past decade and a half. Foreign investors now represent a dominant force in JGB trading activity, fundamentally altering market dynamics.

This shift represents a fundamental change from a market previously dominated by domestic institutional investors with long-term holding strategies to one increasingly driven by investors with considerably shorter holding periods. The transformation has implications for market stability and volatility patterns going forward.