TOKYO -- In a bid to reduce the risk of interest rates spiking or plummeting unexpectedly, Japan's finance ministry plans to jump-start the government bond market by requiring major brokerages and megabanks to participate in auctions, The Nikkei has learned.
The plans will be discussed at a meeting with market participants next week.
The Bank of Japan has maintained record easing since last April, with a pledge to expand the monetary base by purchasing 40-50% of all newly issued long-term Japanese government bonds. As a result, the amount of JGBs available on the market has dropped sharply, raising the risk that interest rates will surge if investors run into difficulty unloading them in a dormant marketplace.
JGB yields have a significant impact on consumers and corporations because they serve as yardsticks for the country's mortgage and bank lending rates.
The Ministry of Finance aims to revitalize the JGB market through auctions for enhanced liquidity, a method that also enables it to offer additional popular issues of outstanding JGBs. Currently, the bidding is voluntary, but starting in April, the ministry will mandate that the 20 brokerage houses and three megabanks bid for 3% of JGB offerings.
Under this system, brokers will be pressured to sound out their clients -- such as life insurers and regional banks -- regarding their appetite for JGBs. They will use this feedback to gauge demand and bid accordingly at auctions. The ministry hopes that participating brokerages will step up efforts to determine what issues a broad range of clients favor. The results could breathe new life into the JGB market, according to ministry officials.
In addition, the ministry will shorten the grace period for additional issuances from four months to one month. JGB offerings auctioned to enhance liquidity will be increased by 1.2 trillion yen to 8.4 trillion yen ($80.55 billion) for fiscal 2014.