The 40-year Japanese government bond auction is set to take place on Wednesday, with analysts wary of a potential "meltdown" repeat.

Traders are wary of the risk of another crash in the Japanese bond market on Wednesday, when the Japanese government will issue 40-year Japanese government bonds. Recent market performance has shown that bonds of this maturity are prone to extreme fluctuations. The auction comes after Japanese government bond yields surged to a historical high about a week ago, following former Prime Minister Naoto Kan's announcement of plans to cancel the two-year food consumption tax. The yield on the 40-year Japanese government bonds skyrocketed by over 25 basis points last Tuesday, reaching its highest level since their introduction. Barclays securities strategists Ayao Ehara and Shinichiro Kadota stated in a report, "Headline risks related to fiscal policy could further exacerbate. If such concerns arise again, the yield faces the possibility of similar upward pressure as last week. Given the risk of a significant increase in yields, the auction results may be disappointing." A weak bond auction could trigger a wave of long-term bond sales, thereby putting pressure on the yen. This could intensify speculation in the market about official intervention in the forex market to support the yen exchange rate. Although Japanese bond prices have rebounded slightly since last week's plunge, investors still anticipate greater volatility in the market ahead of the snap election on February 8. The largest opposition party in Japan, the "Democratic Party for the People," promises a permanent reduction in the consumption tax, fueling concerns that fiscal discipline may weaken regardless of the election outcome. Naoya Hasegawa, chief bond strategist at Okasan Securities, stated, "The current market environment is not favorable for bond auctions, as the direction of the election results and food tax relief remains uncertain, which may prompt investors to take a more cautious approach." Meanwhile, the yen is currently hovering near its highest level since November, as previous remarks by Japanese officials have sparked speculation in the market that the government may intervene to prevent further decline of the yen. Naoto Kan issued another warning on Sunday, stating that the government is prepared to take action given the yen's depreciation and bond yield surge. Analysts suggest that the results of the 40-year Japanese government bond auction on Wednesday may trigger further tough statements or actual forex interventions; although Japanese government bonds have calmed down after last week's intense fluctuations, the sale of the longest-term Japanese government bonds remains a major hurdle. Investors expect the Japanese government to exert pressure to ensure a successful auction, but this does not mean secondary market trading will remain calm. According to a knowledgeable official from the Ministry of Finance, preventing market turmoil after the election has become a headache for the Naoto Kan administration and the Bank of Japan. Recent polls have shown a slight decrease in Naoto Kan's approval rating, indicating the risk of her decision to hold a snap election. The upcoming auctions of 10-year and 30-year Japanese government bonds next week will also be a key test of investor demand for long-term bonds. Ataru Okumura, senior interest rate strategist at SMBC Nikko Securities, stated, "Concerns about the food tax relief have heightened cautious sentiment among investors for all government bond auctions during the election period."