Shoki Omori is Mizuho Securities Chief Desk Strategist for Rates and FX in Tokyo, a graduate of Columbia University whose work as an economist and financial professional have turned him into a dedicated Bank of Japan watcher.
No surprise then that for the past several weeks he has been tracking, analyzing, and writing about the tremendous volatility in Japan’s government bond market. He says moves there have been so extreme lately that bond market players around the world are now starting to track long-term JGB’smarket in a way that has not been seen for decades.
In fact, the big story coming out of this week’s Bank of Japan meeting was not that it held its key rate steady as Japanese inflation continues to rise as uncertainty over tariffs, war in the Middle East, and concern over rising oil prices argued for a contined pause.
Instead the BOJ move that was the lead of the post-meeting stories at most financial news agencies was the its announcement that it will will ease up on the slowdown in bond purchases that has been seen as needed step on the path to policy normalization but recently has been seen as a force exacerbating the sell off in long-term JGB’s.
So dive in and hear Shoki explain how Japanese life insurance companies - “lifers” - and pension funds are key players in the major shift that caused them to change the maturities of bonds they are buying, and why he thinks the BOJ’s plan will work.
Get his views on what will ultimately lead the BOJ to hike its key rate again sometime before the end of 2025. Spoiler alert: rising wages may hold the key.
For those of you who want to get a detailed, technical, comprehensive view of this, I am including a report he wrote earlier this month further down in this overview.
First, some of the key points Shoki made this week after the BOJ meeting.
BOJ is dovish on the Geopolitical risks 00:02:17.100
So <Ueda> was obviously dovish on the geopolitical risk and the slowdown in the economy from the US. And sentiment in the household sector because of these tariffs, and of course, high inflation in Japan. So he set the tone that the BOJ will continue on an easy pace in terms of monetary policy. I would say that that the message is pretty clear. And many people thought that the BOJ’s hiking cycle will be pushed back.
BOJ stays in a wait and see mode as politics loom 00:03:34.750
I think it's the latter <wait and see what happens>, because in Japan it's a difficult situation, because we have so-called Upper House election
coming up in in July, and I don't think the Governor could go too hawkish when the leading party in Japan is struggling to get votes. So that's one strong reason why Ueda kept his tone.
Improved situation for Ishida could impact BOJ policy 00:04:32.660
Yes, I do think so, <things are looking up for Ishida>. If he gets the majority at the House election in July. I do still think that the BOJ could tweet twist. and they could go for a hike. Possibly this year end of end of this year, say October. And that's really reasonable, I think.
BOJ Shifting its bond buying plans- 00:05:43.230
So one reason BOJ bond buying is shifting, obviously, as you mentioned, is volatility in the long end; it has risen since March, when the German Government boosted its fiscal position on defense, and of course, in the US. When the tariffs came in yield curve just broke, and as a result. yen yields just broke as well. and there were no supports from Japanese real money investors; that was that was a big concern for the Japanese government, because. right now, Japanese real money investors are not buying much, especially the big buyers, such as life insurance companies and Pension Funds. They are not really buying the super long end and thereby the BOJ might have to slow down the pace of activity.
There are supply and demand issues at work 00:07:44.010
So there's two parts. One is supply, and second is demand. First of all, in terms of supply. It's over! Issuing the long end, 20- or 30- or 40- a month was over. Yields went down when Covid hit. Obviously, I think this is same for any country around the world. But Japanese government has been issuing long end bond because life insurance companies had to switch and buy a new bond from a legal perspective. The Japanese life insurer used to value bonds on book value. But the new regulation started this fiscal year making life insurers measure risk value bonds on market value. So if they were holding old bonds, at book, the market value is so low that they had to sell those bonds and buy the new bonds. So, to buy new bonds. The Minister of Finance had to issue new bonds, and that's why supply increased over the past few years And, in addition to Covid effects on the demand side. So, many of the big life insurers, the really big ones. are already compliant to the regulation. They don't really need to buy duration. And because of that, not many life insurance companies are buying the super-longs. They just have to hold, and keep holding on to the bonds they purchased, the new bonds. And second, Japanese young people are not really buying life insurance policies. Nowadays they're buying ETFS, because. though those are more predictable rather than life insurance policies, I guess.
Maturity shuffle 00:10:43.100
At this point the consensus, is that the reduction is going to be in the long end - so the BOJ policy itself, I don't think is going to get hit significantly on the long end. It's more about the issue on the supply side, not the demand side. But, at the same time, the BOJ could come back and say the 10-year Bond life insurance companies bought will have to shift to buy either 20-year or even 30-year rather than going back. Going down to say 5-year. I don't think they will buy like 5-year bonds, because their duration won't match. So if it works properly, I do see a chance that the Lifers will buy more of the super long end ones.
BOJ Purchases formerly set at Yen400 Bln per Qtr 00:12:05.540
So if they cut back, if they continued reducing 400 billion per quarter. they, might have thought that the current volatility in markets would increase. Not just in Japan, but around the world, it is going to be a little bit too risky, but giving guidance that they will reduce volumes next year does have a point. And I think this is the key. Like if they started to reduce, say next month. I mean, they could have done it. It's possible, I think technically speaking, I think they could have done it, but they didn't, because that would have given the market a big surprise. And if the reduction came now, the volatility not just in the super long end, but even in the belly - the medium term - or the long term could just go up and down, depending on where the treasury is and what the Fed is going to do. We are expecting the Fed to cut rates and see September as likely. The tariff negotiation is still going on. We still don't know what is going to happen geopolitically. And we haven't seen US data coming down. And of course, even Japanese data, hard data, has been pretty solid to be honest.
Policy makers had and they used flexibility 00:14:01.900
So I do guess that they had some room for discretion. They had some scope to wait until next year, but they did give guidance. So that is like a good option. I would say.
Market linkages appear- 00:15:19.210
Obviously, the US Bond market has been affecting JGB's. But now, like I would say, like almost everyone who is in the yen bond market trading is watching JGBs because they fear that JGBs are going to affect their markets. And I've talked to US Treasury investors, I mean, they're saying they're watching JGBs because potentially they could get hit from JGB's. And it had happened in May, when the 20-year JGB. Auctions came out really weak on that day. Treasuries went up after a massive sell off, and a 20-year bond in in JGBs. And the other story is that if JGBs. Are going to get downgrading ratings. will that have significant effect on other markets as well? I mean those questions are being asked quite often these days, and that that signs I really important mark that that JGBs are on many market investors. Radar, I would say.
Ultra long sector is not about the economy 00:18:37.710
So as for Japan, the BOJ conducted the so called, the comprehensive assessment of the economy, if you remember, and in that paper on the BOJ clearly said that the long end - that the super long end of the yield curve-does not really impact the economy. And of course, the effect if they were to reduce the super long purchases from the Ministry of Finance that is not really going to be an issue for the BOJ. That's their assessment, I guess. If they were confident that they could (impact the long end)without disturbing the market. And of course, the economy gradually, and I mean have having cost push to inflation doesn't really hit the demand side of the Japanese economy. So I would say it. We are in a different situation compared the US. Situation that you mentioned, and where we are now in in Japan. So I think the BOJ of course, acknowledges that that the US went through a tough time. So I think <they will use the US taper experience> as a history book they will use that as an example.
Long end reductions may wind being issued in the short end 00:20:48.390
So we have this so-called primary data conference on the 20th. This week, basically we are going to get a rough amount of reduction in issuance. So if that issuance is in line, or even bigger than what the consensus is expecting. That will be a good sign to contain the volatility in the super long end. Right? So that that's why. But at the same time we have to be careful, because when, when the Ministry of Finance is going to cut back on the long end, they are going to issue the shorter end. and if they are going to issue the shorter, end and the While I might not see this as a base case, but if they were to hike in, say July. the 2-year bond, or the 5-year Bond or the Treasury bills, Those yields could just pop up. So that's the risk, I see. But I don't think the markets are going to react that way, because the markets are not expecting the BOJ to hike then.
Japan wage data will accommodate a rate hike 00:22:49.500
I think, in terms of wage data. I'm already pretty confident that the BOJ is ready to hike so I would say in terms of the demand side data as long as consumption demand, and wages are up, That's a good sign for the BOJ to hike. But we just have to be careful about the tariff negotiations, because Japan, I mean, went to the US. We were the first one to get to the President. But the negotiations are taking time compared to say UK, so we just have to wait for that, and I think the BOJ is waiting for that as well. And, in the meantime, I just hope that the hard data in Japan doesn't deteriorate. So that's my take.
Mizuho Securities: From Duration Titans to Global Nomads: Japanese Lifers’ Retreat from Long-end JGBs, Further Pivot to Alternative Investments
In the second half of FY 2024, Japanese life insurers shifted into defense: 30-year JGB yields leapt from just under 2 % in October to about 2.5 % at end-March—and briefly 3.2 % in May—erasing the solvency benefit of extra duration and prompting insurers to halt long-end purchases, shorten swap overlays and leave the long end to clear only on yield spikes. Overseas books shrank below Y30tn as USD-hedge costs near 4% pushed the industry hedge ratio to a 14-year low of 43%, steering money into unhedged US spread assets and modestly hedged core-euro bonds. Capital relief in addition came from a continued increase in reinsurance outflows, which jumped to more than Y6.7tn by mid-2024 and allowed insurers to off-load long-dated liabilities while redeploying cash into higher-yielding credit. For FY2025 the majors plan a net roughly Y1.3trn cut in JGBs, further drift lower in hedge ratios, continued belly-of-the-curve swap hedging and still-rising use of offshore reinsurance, implying a quiet life-insurance bid at long-end JGB auctions but lively activity in cross-border credit and other alternative assets.
Japanese life insurers spent the second half of FY2024 on the defensive as long-end JGB yields marched from just under 2% in early October to roughly 2.5% by 31 March and spiked to 3.2% in May 2025. That rise, driven by the BoJ’s policy-normalization signals, a string of weak auctions and global rate shocks, wiped out the capital benefit of holding extra duration under the new economic-value-based solvency regime. Insurers therefore halted purchases of 30- and 40-year bonds, rotated about Y170bn of receiver-swap exposure from the ultra-long end into the 7- to 10-year sector, and relied on short-dated JGBs or floating-rate assets to keep duration in check. Although they refrained from outright dumping their existing super-long holdings, demand at the long end now appears only when yields lurch higher, leaving future auctions vulnerable to further volatility. Overseas portfolios contracted as well. The combined foreign-bond book of the ten majors slipped below Y30tn, and the industry hedge ratio fell to a 14-year low of 43% because dollar hedging costs hover near four percentage points. Insurers let large blocks of currency swaps lapse, kept most euro exposure hedged and concentrated in Bunds and OATs, but accepted unhedged risk in U.S. investment-grade credit, agency MBS and senior CLO tranches, where yield pick-up offsets FX swings. A temporary tightening in cross-currency-basis swaps shaved 10–15bp off hedge costs yet merely slowed, rather than reversed, the drift lower in hedge cover.
The strategic release of capital is increasingly coming from offshore reinsurance rather than from buying super-long JGBs. Payments for “insurance and pension services” routed mainly through Bermuda have ballooned from Y0.8 trillion in 2020 to more than Y6.7 trillion by mid-2024, as block transfers such as one lifers’ large annuity deal strip long-dated liabilities off the balance sheet and free cash for redeployment into higher-yielding spread assets. At the same time, public filings show no evidence of insurers taking outright short-rate positions via bear funds or payer swaptions; they prefer passive duration run-off, belly-curve swaps and liability transfers that damp capital volatility without attracting the stigma or margin costs of an overt short. Looking ahead to FY2025, the big lifers plan a net Y1.3tn reduction in JGB holdings and only opportunistic buying at auction tails. New money is earmarked for unhedged U.S. spread products and modestly hedged core-euro sovereigns; swap overlays will remain centered on the 7- to 10-year zone; hedge ratios could fall further unless the basis widens; and use of Bermuda reinsurance is set to grow despite tighter regulatory scrutiny. The upshot is that Japanese insurers will stay quiet in Tokyo’s super-long market but active in cross-border credit and reinsurance corridors, leaving the far end of the JGB curve without its once-dependable domestic bid and prone to bouts of yield spikes whenever supply meets thin demand.
Lifer Trade Ideas:
6m30y payer swaptions struck at 3.25%, while selling 2y receiver swaptions
Conditional 10s30s bear steepener with swaption overlay at 92bp
Buy 3m USD/JPY 25d calls and sell 3m EUR/JPY 50d puts
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