Japan to launch new floating-rate bonds as BOJ eyes rate hikes

By Takaya Yamaguchi

TOKYO (Reuters) - Japan will introduce a new type of floating-rate note that helps investors mitigate the risk from rising bond yields, two government sources told Reuters, a sign policymakers are gearing up for further interest rate hikes.

The move is part of the government's efforts to ensure it can keep selling debt smoothly, even as the Bank of Japan (BOJ) trims its huge bond buying and eyes more hikes to near-zero interest rates.

A tapering of bond buying and rate hikes by the central bank both work to push down bond prices and prop up yields. Interest rates and bond prices have an inverse relationship.

The new note will have a short-term duration and a floating interest rate that would rise in accordance with market interest rates, the sources said on condition of anonymity as they were not authorised to speak publicly.

The floating rate will help reduce the losses investors could incur in the event of a BOJ rate hike, thereby keeping bonds an attractive investment vehicle for banks, the sources said.

Most government bonds sold in Japan and elsewhere have fixed rates broadly tied to the cash rate at the time of issuance. In Japan, the BOJ's prolonged ultra-loose monetary policy has meant the current stock of bonds offer very low yields.

The government will aim to issue the new note from fiscal 2026 with two- and five-year bonds seen as possible options, they said.

It will come up with details, such as the maturity of the bonds, how much it will raise from the issuance and how frequently it will adjust the floating rate, after discussions with private investors, the sources said.

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

While the government has sold floating-rate notes with 15-year maturity in the past, it is the first time it will issue floating-rate notes with short-term durations. Short-term notes are more vulnerable to swings from central bank policy shifts.

The BOJ ended negative interest rates and other remnants of its radical monetary stimulus in March, making a landmark shift away from a decade-long, ultra-loose monetary policy.

Governor Kazuo Ueda has signaled the chance of raising short-term interest rates further. The BOJ is also scheduled to release this month a detailed plan on how it will trim its huge bond buying and reduce its nearly $5 trillion balance sheet.

Any rise in Japanese government bond (JGB) yields would boost the cost of funding the country's ballooning public debt which, at twice the size of its economy, is the largest among major economies.

(Reporting by Takaya Yamaguchi, writing by Leika Kihara; Editing by Sam Holmes)