Analysis: The long-end JGBs are gaining favor in the market. The Ministry of Finance's consultation on the bond issuance plan is not enough.

Japanese government bond futures weakened due to the strong inflation in Tokyo and expectations of strong industrial production value in August. However, besides robust data, there are more factors that can keep Japanese government bond traders on the defensive. The Japanese Ministry of Finance is reported to be considering reducing the issuance of ultra-long-term government bonds and has asked for the opinions of traders again. In June, the Ministry of Finance took action to reduce the auction size of long-term Japanese government bonds, but it had no effect as the yield on 30-year government bonds has been rising since then. The real challenge for Japanese fixed-income investors is the underperformance of issued government bonds, as some believe that the Bank of Japan is behind the trend in raising interest rates. If the Ministry of Finance can buy some deeply discounted bonds that are harming market liquidity, the effect will be better. Meanwhile, the central bank needs to continue its efforts to raise rates to neutral levels and reduce the implied negative interest rates in the yield curve. At the same time, Japanese government bond futures are showing a bearish trend, with open interest reaching the highest level since February, indicating there will be more downward room after contracts roll into December.