06:50 AM EDT, 05/28/2025 (MT Newswires) -- The scale of the drop in Japanese government bond (JGB) yields in response to the news that the country's ministry of finance (MoF) was seeking feedback from JGB market participants about its issuance plans looked somewhat overdone and the result of Wednesday's 40-year JGB auction has disappointed and seen a renewed jump higher in yields, sai MUFG.

After a period of sustained selling of JGBs, positioning was likely a factor in the sharp drop in yields, wrote the bank in a note to clients. But tweaks to issuance plans will only go so far in helping curtail yields.

The MoF in its FY25 issuance plans has already reduced 30- and 40-year issuance by 1.2 trillion yen in each tenor, or by 11% and 29% respectively. The issuance of five-year JGBs and t-bills is set to increase to offset this issuance cut, stated MUFG.

The MoF Wednesday sold 500 billion yen worth of 40-year paper at a yield of 3.135% with a bid-to-cover of 2.21 compared with 2.92 in March. It was the lowest bid-to-cover since July 2024, pointed out the bank.

The fallout in yields has been contained, which was likely down to comments earlier by Bank of Japan Governor Kazuo Ueda, added MUFG. After the BoJ had previously come across as indifferent, Ueda's comments have changed that.

The governor sounded much more focused on the issue when speaking in parliament on Wednesday, stating that the BoJ would "carefully watch market movements and their economic impact" adding that "significant fluctuations" in super-long yields can affect yields across the entire yield curve.

This was a signal that the BoJ acknowledges that the moves at the very long-end can impact the transmission of the BoJ's monetary stance. That implies the potential for action if it undermined the achievement of the BoJ's inflation goals, noted the bank.

While Governor Ueda's comments have helped to contain the JGB yield rise, MUFG suspects the BoJ will remain very reluctant to alter its current policy plans that would be portrayed as Kapan's central bank shifting its policies quickly in response to inevitable rises in yields. The BoJ is determined to normalize the monetary policy framework and not reacting would be the best signal that decades of mild deflation have come to an end.

As a consequnce, the onus is likely to fall back on the government to address fiscal deficit concerns. A Japanese government advisory panel -- The Fiscal System Council -- warned Wednesday that the government "must manage finances with a heightened sense of urgency to prevent rising debt costs from crowding out essential policy spending." For now, Prime Minister Shigeru Ishiba is at least rejecting calls for additional spending financed by JGB issuance.

There is a risk going forward that long-end JGB risks could encourage a shift to a more dovish stance by the BoJ, which could be deemed as yen (JPY) negative, according to MUFG. However, external circumstances would be important in determining the foreign exchange impact.

At this juncture, the bank doubts the BoJ is close to any shift in stance and international factors will continue to lend to yen appreciation over the nearer-term.