Japan Eases Market Jitters with 10% Cut to Super-Long Bond Sales

Economic

Summary:

Japan plans to trim its sales of 20-, 30-, and 40-year government bonds by 10% to stabilize market confidence after soaring yields and weak auction demand...

Market Context and Policy Shift

In response to growing market unease and volatile bond auctions, the Japanese government is poised to revise its fiscal 2025 bond issuance strategy by reducing super-long bond sales by approximately 10%. The move, outlined in a draft seen by Reuters, is designed to ease pressure on the bond market, where yields on long-dated Japanese Government Bonds (JGBs) have recently surged to record highs, triggered by poor auction results and global bond selloffs.

This is an unusual mid-year shift for Japan, which traditionally adheres to its fiscal bond plans. The decision reflects not only domestic financial considerations but also Japan’s sensitivity to global bond market dynamics and the need to prevent a widening supply-demand mismatch.

Breakdown of Changes: Super-Long Bonds Slashed, Short-Term Debt Rises

Under the revised plan, sales of the following super-long bonds will be reduced:

20-year JGBs: Reduced by 900 billion yen to 11.1 trillion yen

30-year JGBs: Cut by 900 billion yen to 8.7 trillion yen

40-year JGBs: Decreased by 500 billion yen to 2.5 trillion yen

These cuts imply that beginning next month, each of these maturities will see their auction amounts reduced by 100 billion yen. To compensate for this reduction and to maintain overall financing capacity, the Ministry of Finance will ramp up issuance of shorter-term notes and retail-oriented JGBs:

Two-year debt: Increased by 600 billion yen

Treasury discount bills (1-year and 6-month): Each raised by 600 billion yen

Principal-guaranteed household bonds: Uplifted by 500 billion yen

Overall, the annual JGB issuance for FY2025 will be revised down by 500 billion yen to 171.8 trillion yen.

Strategic Considerations and Market Impact

This adjustment is a strategic compromise. While increasing short-term issuance allows for quicker absorption by the market, it also raises refinancing risks — particularly if interest rates climb or volatility spikes. The shift away from long-term debt suggests an evolving investor profile, especially as Japanese life insurers scale back long-term purchases after meeting regulatory requirements related to solvency reforms.

In parallel, the Bank of Japan’s (BOJ) announcement to slow the pace of quantitative tightening (QT) starting next fiscal year reinforces a cautious policy stance. It suggests that despite a gradual move toward normalization, the BOJ remains sensitive to bond market fragility and does not wish to trigger further yield spikes.

There is also discussion within the government of buying back older, low-coupon super-long JGBs from the market. This would help ease the inventory glut and may offer better price support at auctions.

Global and Domestic Pressures Converge

Japan's bond market is increasingly influenced by global dynamics. The selloff in global bonds last month, triggered by concerns over U.S. debt sustainability and rising geopolitical tensions, also impacted JGBs — particularly at the super-long end, which tends to be more illiquid and sensitive to shifts in demand.

As major economies face ballooning fiscal deficits and higher interest costs, investors are scrutinizing sovereign debt sustainability more closely. Japan, with the highest public debt-to-GDP ratio among developed nations, is now recalibrating its strategy to align with market realities without compromising fiscal credibility.

Japan’s move to reduce super-long bond issuance represents a prudent, market-calming measure as the government balances fiscal flexibility with bond market stability. The rare revision shows that Tokyo is paying close attention to bond demand dynamics and is willing to adapt issuance patterns to support smoother market functioning. However, the shift toward shorter-term debt also introduces rollover risk, suggesting that Japan’s debt management strategy must remain agile amid rising domestic and global financial headwinds.

Source: Reuters

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Economic

Forex

The Indian rupee is likely to extend its recent fall at the open on Thursday, bogged down by the U.S. dollar's overall strength and risk aversion amid the ongoing Iran-Israel conflict.

The 1-month non-deliverable forward indicated a open in the 86.54 to 86.58 range, versus 86.4775 in the previous session. The Indian rupee has declined 0.5% over the last two sessions, weakening past key support zones.

A currency trader at a bank said the next support lies at 86.70–86.75, which corresponds to the mid-April low.

"The rupee was already struggling with oil prices. Now, it has to deal with the dollar regaining some safe-haven appeal—at least that’s what the price action suggests," the trader said.

The dollar indexrose 0.2% on Thursday, climbing past the 99 mark. U.S. equity futures and Asian shares slipped, while the U.S. currency advanced 0.2% to 0.8% against Asian currencies on likely safe-haven demand.

Investor attention stayed fixed on the Iran-Israel conflict and the risk of U.S. involvement, with the two countries exchanging further air strikes on Thursday.

Asked outside the White House on Wednesday whether he had decided to support Israel’s air campaign, President Donald Trump said, "I may do it. I may not do it."

Markets have so far been complacent about the Iran-Israel battle, with sentiment broadly holding up, DBS research said in a note.

However, any direct U.S. involvement could trigger a deterioration in sentiment, it said.

Meanwhile, the Federal Reserve, in line with expectations, made no changes to the policy rate, while raising its inflation forecasts and trimming growth projections.

Analysts said the updated dot plot sent mixed signals. While the Fed maintained its forecast for two cuts in 2024, it trimmed the number of projected cuts for 2025 and 2026 by one each.

DBS noted that two cuts in 2025 are dovish, while the projections for 2026 and 2027 leaned hawkish.

Source: Reuters

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Economic

Fed Holds Rates but Eyes Two Cuts in 2025

The Federal Open Market Committee (FOMC) kept its benchmark interest rate unchanged for the sixth consecutive meeting, maintaining the target range at 4.25%-4.5%. However, the closely watched dot plot indicated that two quarter-point cuts remain likely before the end of 2025, despite increasing internal divergence among Fed officials.

The Fed also trimmed its long-term easing outlook, now projecting only four rate cuts between 2025 and 2027, down from six previously expected. By 2027, policymakers anticipate the fed funds rate settling near 3.4%, though opinions varied significantly.

Notably, seven out of 19 participants now see no rate cuts this year, up from four in March—underscoring growing caution within the Fed over inflation’s persistence.

Stagflation Signals in Forecasts

The Fed’s updated economic projections reflect an uncomfortable blend of slowing growth and sticky inflation. The 2025 GDP forecast was lowered to 1.4%, down 0.3 percentage points, while inflation is now expected to hit 3%, also 0.3 points higher than previously projected. Core PCE, excluding food and energy, was revised to 3.1%, and unemployment is forecasted to rise modestly to 4.5%, above the current 4.2%.

Chair Jerome Powell acknowledged these risks during his press conference, stating the Fed remains in “wait-and-see” mode and is “well positioned to wait” before making policy changes. He reaffirmed that uncertainty has eased somewhat but emphasized that both geopolitical instability and tariff-driven inflation remain critical watchpoints.

Tariffs and Politics Cloud Policy

President Donald Trump has reintroduced substantial tariffs, and their effects are beginning to ripple through economic data. Powell warned that “the cost of the tariff has to be paid” and that rising consumer prices are likely in the coming months.

Trump, meanwhile, remains publicly critical of the Fed. On Wednesday, he repeatedly attacked Powell, saying rates should be 2 percentage points lower, calling the Fed Chair “stupid” for not easing faster. The 90-day trade negotiation window may ease tensions slightly, but the administration’s aggressive fiscal and trade posture is clearly complicating the Fed’s inflation outlook.

Market Reaction and Economic Data Signals

Markets were largely unmoved immediately after the Fed’s announcement, with equities flat and yields steady. However, the underlying economic data suggests growing downside risks. Retail sales fell nearly 1% in May, while housing starts hit a five-year low. Layoffs are increasing, and long-term unemployment is ticking up, contributing to a sense of creeping stagnation.

Chris Zaccarelli of Northlight Asset Management summarized the market’s perception: the Fed is “sitting on their hands,” waiting for a decisive shift in inflation or employment. The bias remains toward easing, but only if data supports it.

Debt Pressure and Political Influence

One of Trump’s key motives in pushing for rate cuts is fiscal. With $36 trillion in national debt and $1.2 trillion in projected interest payments this year, debt servicing has become the government’s third-largest expenditure, trailing only Social Security and Medicare. Sustained high interest rates strain the budget and fuel political urgency to lower borrowing costs.

The Fed's June decision reflects a precarious balance: inflation remains elevated, but growth is slowing, and political pressure is intensifying. The central bank still expects to cut rates twice in 2025, but any action will depend on whether tariffs accelerate inflation or whether labor market weakness forces its hand. For now, the Fed is holding firm—poised to pivot only when the data demands it.

Source: CNBC

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Economic

Stocks

Heightened Geopolitical Risk Pressures Asian Stocks

Markets across Asia declined on Thursday as investors reacted to intensifying geopolitical uncertainty. President Donald Trump’s ambiguous remarks—“I may do it. I may not do it”—regarding a possible U.S. strike on Iran kept markets on edge. The Wall Street Journal added to the tension by reporting that while Trump has approved military plans, he is waiting to see whether Tehran halts its nuclear activities.

Amid this uncertainty, Japan’s Nikkei 225 dropped 0.8%, weighed further by a strengthening yen that undermines export earnings. Taiwan’s TAIEX slipped 0.9%, and Hong Kong’s Hang Seng Index lost 0.8%, reflecting broader investor retreat from risk assets. U.S. equity futures also pointed lower, with S&P 500 futures down 0.4%, though U.S. markets were closed for the Juneteenth holiday.

Gold and Yen Attract Safe-Haven Demand

As risk sentiment soured, safe-haven assets gained favor. Gold rose 0.3% to $3,378 per ounce, moving toward recent highs as investors sought shelter from potential military escalation and economic fallout. The Japanese yen firmed to 144.92 per dollar, up 0.2%, supported by its traditional safe-haven status.

The U.S. dollar also strengthened, gaining 0.1% against the euro to $1.1472 and 0.2% against sterling to $1.3398. Meanwhile, the Swiss franc edged slightly lower to 0.8193 per dollar, ahead of a key policy decision from the Swiss National Bank (SNB).

Oil Prices Hold Despite Conflict Fears

Despite growing concern over Middle East stability and global energy supplies, Brent crude edged down to $76.32 per barrel, not far from its recent high of $78.50, a 4.5-month peak. Market participants appear to be cautiously watching for actual disruptions before driving prices higher.

Analyst Kyle Rodda of Capital.com noted, “The fear is that if the U.S. intervenes, it would mark a material escalation, potentially triggering retaliation by Iran, raising the risk of broader regional conflict and energy supply shocks.”

Central Banks in Focus Amid Market Uncertainty

Investors also turned their attention to major central banks. The Bank of England is expected to hold rates steady, while the Swiss National Bank may cut rates by 25 basis points, continuing its effort to ease monetary conditions amid softening inflation.

In the U.S., the Federal Reserve maintained rates and its outlook for two 25-basis-point cuts in 2025, but Chair Jerome Powell cautioned that tariffs imposed by the Trump administration could cause “meaningful” inflation in the coming months. His comments added to uncertainty, as markets balance the risk of sticky inflation against signs of slowing growth.

The confluence of rising geopolitical tensions, cautious central bank policy, and uncertain inflation outlooks has made investors increasingly risk-averse. With the specter of U.S. military action in the Middle East and a global economy still adjusting to monetary policy shifts, markets may remain volatile in the near term. Investors are now watching closely for further developments from both Washington and Tehran, as well as upcoming inflation data and central bank statements.

Source: Reuters

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Economic

Employment Declines Against Expectations

Australia’s labor market posted a surprise contraction in May, losing 2,500 jobs, contrary to economists’ forecast of a 21,200 gain. The decline was entirely due to a sharp 41,100 drop in part-time jobs, partially offset by a 38,700 rise in full-time positions, according to data released by the Australian Bureau of Statistics.

The unemployment rate held steady at 4.1%, but this was largely due to a marginal dip in the participation rate to 67%, suggesting that fewer people were actively looking for work. This trend points to hidden slack in the labor market, and although joblessness remains historically low, the upward drift from its post-pandemic low of 3.4% reflects a steady deterioration in labor market momentum.

Implications for Monetary Policy

The data arrives at a sensitive time for the Reserve Bank of Australia (RBA). Since adopting a more dovish tone in its May meeting—where it lowered rates for the second time this year—the central bank has hinted that future decisions would depend on domestic demand and external pressures. The current job figures, while not disastrous, strengthen the case for another rate cut at the July 8 meeting, which is already priced in at 80% probability by money markets.

APAC economist Callam Pickering of Indeed observed that forward-looking indicators of labor demand remain robust, but “the data will continue to take a backseat to economic and geopolitical uncertainty.” He expects the RBA to implement at least two more cuts by September, reducing the cash rate from 3.85% to potentially 3.35% in staged moves.

Geopolitical Risks and Economic Headwinds

Beyond the domestic slowdown, Australia faces intensified global risks. Surging oil prices driven by escalating Israel-Iran tensions, as well as higher U.S. tariffs, sluggish Chinese demand, and the persistent Ukraine-Russia war, present further downside threats. Treasurer Jim Chalmers acknowledged these risks earlier in the week, describing the global economy as “a pretty dangerous place” and warning that Australia “won’t be immune.”

These external shocks add further justification for accommodative monetary policy, as rising costs and declining export demand could strain households and businesses already coping with slower income growth and persistent cost-of-living pressures.

Labor Market Trends Behind the Headline

Annual employment growth still outpaces population growth, with jobs up 2.3% year-on-year versus 2.1% population growth among working-age Australians. However, the underlying shift toward full-time work at the expense of part-time roles could suggest some rebalancing in job quality.

Underemployment fell slightly to 5.9%, and underutilization (combining underemployment and unemployment) dropped to 9.9% from 10.1%, indicating some efficiency in labor use. Yet, economists warn these positive signals may not hold if broader public sector hiring trends reverse.

Indeed, Commonwealth Bank’s Harry Ottley noted that 80% of jobs growth since 2023 came from the non-market sector—mainly healthcare, education, and public administration, all heavily funded by government outlays. Alarmingly, this segment contracted last quarter for the first time since 2021, with its annual growth rate plunging from 8.3% to 4.8% in just six months. If this slowdown persists, total employment could begin to decline more sharply in the second half of 2025.

While the May job report shows only modest overall losses, the weakening part-time sector, falling participation, and potential peaking of public sector job creation suggest that Australia’s labor market is softening. Combined with heightened external risks, the RBA is likely to proceed cautiously, leaning further into monetary easing to shield the economy from a broader downturn. Markets now expect July to bring another rate cut, with more likely before year-end if downside risks materialize.

Source: Bloomberg

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Economic

Forex

Dollar Resilience Amid Policy Uncertainty and Geopolitical Risk

In Thursday’s Asian trading, the U.S. dollar index hovered around 98.957, cementing a 0.8% weekly gain—its strongest since February. This stability comes despite an increasingly uncertain outlook for U.S. monetary policy and rising geopolitical instability, particularly as the Israel-Iran conflict intensifies with the threat of U.S. intervention.

The Federal Reserve, as anticipated, left interest rates unchanged but signaled that two rate cuts remain possible this year. However, Chair Jerome Powell noted significant upside risks to inflation, particularly from the Trump administration’s tariffs, which are expected to begin impacting consumer prices over the summer.

"Ultimately, the cost of the tariff has to be paid, and some of it will fall on the end consumer," Powell stated, underscoring how input cost pressures could stall rate cut momentum.

Tariffs and Inflation: A Summer Test

The Fed's acknowledgment of lingering inflationary pressures—driven in part by tariffs on Chinese and other foreign imports—has created a complex monetary environment. While economic activity remains “reasonably healthy,” Powell emphasized that future rate decisions will be data-dependent.

According to ING analysts, the September FOMC meeting might be too early for a rate cut, suggesting a December move is more plausible if economic data supports loosening.

At the same time, Trump's renewed criticism of Powell and ambiguous stance on military engagement in Iran are adding layers of political volatility to the central bank’s already delicate decision-making process.

Currency Markets React Modestly

In foreign exchange markets, reactions were relatively muted. The euro traded at $1.14805, heading for its largest weekly loss since early May. The Japanese yen firmed slightly to 144.86 per dollar, while the Swiss franc hovered near 0.81895. The British pound slipped to $1.3398 ahead of the Bank of England’s policy decision, where no rate change is expected.

Meanwhile, risk-sensitive currencies like the Australian dollar and New Zealand dollar both weakened, reflecting broader investor caution. The Aussie slipped 0.3% to $0.649, while the Kiwi fell 0.32% to $0.60105.

Middle East Tensions Compound Risk-Off Sentiment

The Israel-Iran conflict, now in its seventh day, continues to weigh on global sentiment. Speculation about whether the U.S. will support Israel in striking Iranian nuclear facilities has added fuel to safe-haven flows into the dollar and yen, despite their muted movement on Thursday.

With U.S. markets closed for the Juneteenth holiday, investors are likely to await further developments on both the geopolitical and economic fronts before making large directional bets.

While the Fed remains committed to data-driven policy, Powell’s warning about tariff-fueled inflation and the rising specter of military escalation in the Middle East present significant near-term headwinds. With the dollar showing strength in a cautious market, upcoming inflation prints and geopolitical signals will likely dictate the next phase of global currency moves.

Source: Reuters

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Risk Warnings and Disclaimers

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Political

The prospect of a U.S. strike against Iran has exposed divisions in the coalition of supporters that brought President Donald Trump to power, with some of his base urging him not to get the country involved in a new Middle East war.

Some ofTrump'smost prominent Republican allies, including top lieutenant Steve Bannon, have found themselves in the unusual position of being at odds with a president who largely shares their isolationist tendencies.

Bannon, one of many influential voices from Trump's "America First" coalition, on Wednesday urged caution about the U.S. military joining Israel in trying to destroy Iran's nuclear program in the absence of a diplomatic deal.

"We can't do this again," Bannon told reporters at an event sponsored by the Christian Science Monitor in Washington. "We'll tear the country apart. We can't have another Iraq."

The anti-interventionist part of the Republican Party is watching with alarm as Trump has moved swiftly from seeking a peaceful diplomatic settlement with Iran to possibly having the United States supportIsrael's military campaign, including the use of a 30,000-pound "bunker buster" bomb.

The criticism shows the opposition Trump could face from his right-leaning "Make America Great Again" flank should he join the fight, a step that Iran has warned would have big consequences for Americans without specifying what that might be.

A decision by Trump to enter the conflict would be a sharp departure from his usual caution about foreign entanglements. It could impact his campaign to foster good relations in the Gulf and could be a distraction from his efforts to negotiate an end to the war in Ukraine and make tariff deals with countries around the world.

The MAGA coalition propelled Trump into office in the 2016 and 2024 elections and remains critically important to him even though he is prevented by the U.S. Constitution from running for a third term.

Upsetting that base could erode Trump's popularity and factor into whether Republicans hang on to control of Congress in the 2026 midterm elections.

IRAN CANNOT HAVE A 'NUCLEAR WEAPON'

Asked about the rift on Wednesday, Trump appeared unconcerned that some in his base could be turning its back on him, at least on this issue.

"My supporters are more in love with me today, and I'm in love with them more than they were even at election time," Trump told reporters at the White House. "I only want one thing: Iran cannot have a nuclear weapon."

He said some of his supporters "are a little bit unhappy now" but that others agree with him that Iran cannot become a nuclear power.

"I'm not looking to fight. But if it's a choice between them fighting or having a nuclear weapon, you have to do what you have to do," Trump said.

Marc Short, an ally of former Vice President Mike Pence who served as Trump's legislative director during his first term, called the division over Iran within Trump's party a "pretty large rift." He said he thought Trump's base would stay with him despite the differences, however.

"The divisions are obviously coming out in the open in this moment, but ultimately I think that most of the president's followers are loyal to him more so than any worldview," he said.

Short said standing with Israel could help Trump politically, too. Traditionally conservative voters favor standing by Israel. In a Reuters/Ipsos poll conducted in March, 48% of Republicans agreed with a statement that the U.S. should use its military power to defend Israel from threats no matter where the threats come from, compared to 28% who disagreed. Among Democrats, 25% agreed and 52% disagreed.

International experts believe Iran has been intent on developing a nuclear weapon, despite Tehran's denials, and Israel believes it would be at risk as a result. U.S. officials believe if Iran possessed an atomic weapon it would trigger an nuclear arms race in the Middle East.

ISRAELIS NEED TO GET JOB DONE

Bannon, host of the popular "War Room" podcast, said "the Israelis need to finish what they started" and that Trump should slow down deliberations over U.S. involvement and explain his decision-making.

"This is one of the most ancient civilizations in the world, okay, with 92 million people. This is not something you play around with. You have to think this through at this level, and the American people have to be on board. You can't just dump this on them," he said.

Other influential MAGA voices with similar messages of worry include former Fox News Channel host Tucker Carlson and U.S. Representative Marjorie Taylor Greene, a Georgia Republican and long-time Trump ally.

"Anyone slobbering for the U.S. to become fully involved in the Israel/Iran war is not America First/MAGA," Greene said in a social media post on Sunday. "We are sick and tired of foreign wars. All of them."

But another Trump ally, Republican Senator Lindsey Graham of South Carolina, said on Fox News on Tuesday that he hopes Trump will help Israel "finish the job" because Iran represents "an existential threat to our friends in Israel."

The rift was on full display when Carlson, on his streaming program, clashed with Republican Senator Ted Cruz of Texas late on Tuesday.

A clip from Carlson's interview with Cruz went viral with Carlson strongly criticizing the senator for seeking regime change in Iran, and Cruz expressing support for the president.

"You don’t know anything about Iran!" Carlson told Cruz.

"I am not the Tucker Carlson expert on Iran," Cruz fired back.

"You're a senator who's calling for the overthrow of the government," Carlson retorted.

Vice President JD Vance tried to tamp down talk of a rift on Monday with a social media post defending the president.

"People are right to be worried about foreign entanglement after the last 25 years of idiotic foreign policy. But I believe the president has earned some trust on this issue," he said.

Now allies and opponents are waiting on Trump's decision-making process. The president said on Wednesday afternoon he had some ideas on how to proceed but had not made a final decision.