The Bank of Japan signalled on Tuesday that it was prepared to slow QT in response to recent, volatile increases in long-dated yields. It would, said Governor Kazuo Ueda, be “nimble” in response to any rapid rise in long-term interest rates. The question remains: what constitutes normalisation when the population decline is accelerating in Japan. And happening much more quickly than factored into government budget projections.
The total fertility rate has dropped to a record low of 1.15. Earlier this month, annual data published by Japan’s Ministry of Health, Labour and Welfare showed the number of births fell to 686,000 in 2024. This was the first time total births had been below the 700,000 threshold since records began in the 19th century. The decline per se is not unexpected. But the speed of the slump is. The median forecast from the National Institute of Population and Social Security Research (IPSS) had projected that the decline in the annual total for births to 680,000 would not materialise until 2039.
For the immediate future, JGB investors will have their sights trained on events in the Middle East. However, that should not deflect from the larger systemic risks facing the Japanese bond market. Debt sustainability is being called into questions by collapsing demographics. The term premium will rise. And a ‘nimble’ Bank of Japan will be powerless to prevent real yields rising to well above historic norms. Investors, particularly for longer-dated maturities, have every incentive to discount future liabilities. That is what actuaries do. Investors in 30–40-year bonds are, and should be, no different.
