Global: Japan to Introduce New Floating-Rate Bonds Amid Potential BOJ Rate Hikes

In a strategic move to ensure smooth debt issuance, Japan will introduce a new type of floating-rate bond designed to help investors mitigate risks associated with rising bond yields, two government sources told Reuters. This development indicates that policymakers are preparing for potential interest rate hikes by the Bank of Japan (BOJ).

The initiative is part of the government’s efforts to maintain efficient debt sales as the BOJ reduces its extensive bond-buying program and contemplates further hikes to its near-zero interest rates. Both a reduction in bond purchases and rate hikes by the central bank typically lead to lower bond prices and higher yields due to the inverse relationship between interest rates and bond prices.

The new floating-rate bonds will feature a short-term duration and an interest rate that adjusts according to market rates, the sources revealed, speaking on condition of anonymity. This floating rate mechanism will help mitigate potential losses for investors in the event of a BOJ rate hike, thus maintaining the appeal of bonds as an investment for banks.

Currently, most government bonds in Japan and other countries have fixed rates that are generally linked to the cash rate at issuance. In Japan, the prolonged ultra-loose monetary policy by the BOJ has resulted in very low yields on the existing stock of bonds.

The government aims to start issuing these new floating-rate bonds from fiscal year 2026, with potential options for two- and five-year maturities. Detailed plans, including the maturity periods, issuance amounts, and frequency of rate adjustments, will be finalized after consultations with private investors, the sources added.

The Ministry of Finance, which oversees Japan’s debt policy, was not available for comment.

Although Japan has previously issued floating-rate notes with a 15-year maturity, this marks the first instance of issuing short-term floating-rate notes. Short-term notes are more susceptible to fluctuations caused by central bank policy shifts.

In March, the BOJ ended its negative interest rate policy and other aspects of its radical monetary stimulus, signifying a significant shift away from a decade-long period of ultra-loose monetary policy. BOJ Governor Kazuo Ueda has indicated the possibility of further short-term interest rate increases. Additionally, the BOJ is expected to release a detailed plan this month outlining how it will reduce its substantial bond-buying program and its nearly $5 trillion balance sheet.

Any increase in Japanese government bond (JGB) yields would raise the cost of funding Japan’s expanding public debt, which is the largest among major economies, amounting to twice the size of its economy.