MOF Issuance Principles: Stability Over Cost
Understanding MOF's core issuance principles through current examples and comparative analysis
Core Issuance Principles
The MOF's issuance strategy is a careful balancing act between two main, often conflicting, priorities.
Priority 1: Stability over Cost
The MOF must balance these two goals:
- Minimize Cost: Issuing short-term bonds is almost always cheaper (lower interest rates).
- Maximize Stability (Manage Risk): Issuing long-term bonds locks in funding for many years, reducing "rollover risk" (the risk of having to refinance a huge amount of debt during a crisis when interest rates might be spiking).
The MOF's primary goal is stability over cost. As the MOF's Debt Management Report 2025 states:
"Secure stable financing ... at the lowest possible cost, consistent with a prudent degree of risk."
This is why they intentionally issue a large amount of 20, 30, and 40-year bonds—even though they are more expensive—to ensure the government isn't vulnerable to short-term market panic. This also meets the strong demand from Japanese life insurers and pension funds, who *need* long-term bonds to match their long-term payouts.
The Result: Japan's Maturity Distribution
The MOF's "stability over cost" philosophy produces a specific maturity distribution. Here's what's actually outstanding in the market:
📌 Cautionary Example: U.S. Fiscal Crisis and Refinancing Risk (2025)
While Japan's MOF prioritizes "stability over cost" by issuing long-term bonds even when they're more expensive, the United States demonstrates the severe consequences of neglecting this principle:
The Fiscal Reality:
- Exploding Deficit: The U.S. fiscal deficit hit $1.8 trillion for FY2025, driven in part by defense spending expanding toward $1 trillion annually (a 13% increase).
- COVID-19 Legacy: The pandemic triggered $5 trillion in emergency spending (2020-2021), largely financed with short-term debt. While necessary, this created a massive refinancing obligation as those bonds matured.
- Unsustainable Trajectory: The CBO projects cumulative deficits of $22.7 trillion over the next decade, with debt-to-GDP rising from 100% to 120% by 2035.
- The Interest Rate Problem: U.S. Treasury yields have surged and remain elevated (10-year above 4-5% in 2024-2025), a dramatic reversal from the near-zero rates of 2020-2021. This is despite the Fed cutting rates in late 2024—demonstrating that monetary policy alone cannot control long-term yields when fiscal deficits are unsustainable.
The Refinancing Crisis:
This is the critical issue Japan's MOF explicitly avoids:
- Massive Rollover Requirements: The U.S. has trillions in Treasury debt maturing in the next few years that must be refinanced.
- Locked into Higher Rates: Debt originally issued at 1-2% rates (2020-2021) is now being rolled over at 4-5%+ rates, dramatically increasing debt service costs.
- Fiscal Spiral Risk: As interest costs consume more of the budget, it crowds out other spending or forces even more borrowing, creating a vicious cycle.
- Policy Paralysis: The Federal Reserve cannot cut rates as aggressively as markets hoped because inflation remains stubborn, leaving the Treasury stuck refinancing at elevated rates.
Indirect Market Impacts - The "Debasement Trade":
U.S. fiscal unsustainability has driven massive capital flows into alternative assets, creating what traders call the "debasement trade":
- Bitcoin & Cryptocurrencies: Bitcoin surged past $100,000 in late 2024, driven partly by fears of dollar debasement from endless deficit spending. Institutional adoption accelerated as a hedge against fiscal dominance.
- Gold: Gold prices surged to record highs above $4,300/oz in October 2025 (from $2,600 in January 2025) as central banks (especially China, India) diversified away from Treasuries. Gold's role as "non-debasing money" resonates when government debt spirals.
- Stablecoins (USDT, USDC): Paradoxically, stablecoins backed by Treasury bills grew to $200+ billion market cap. While still dollar-denominated, they represent a shadow Treasury market where holders bypass traditional banking, signaling distrust in traditional fiscal intermediation.
- The Common Thread: All three assets benefit when investors lose confidence in sovereign debt sustainability. Japan's JGB market stability (despite 264% debt-to-GDP) looks increasingly attractive by comparison.
Why Japan's Strategy Matters:
Japan's MOF, by issuing 20-, 30-, and 40-year bonds even when short-term debt is cheaper, ensures that:
- Only a small, manageable portion of debt matures each year
- The government isn't forced to refinance its entire debt load during a rate spike
- Interest costs remain predictable and stable over decades
Comparative Debt Management: U.S. vs Japan
| Metric | United States | Japan | Strategic Implication |
|---|---|---|---|
| Total Outstanding Debt | $36 trillion (123% of GDP) |
¥1332.2 trillion (264% of GDP, 2025Q2) |
Japan has 2x higher debt-to-GDP but more stable structure |
| Average Maturity | ~6 years | ~9 years | Japan's longer maturity = less refinancing risk per year |
| Maturity Profile | Heavy concentration in 2-10 year Treasuries | 77% long-term (10Y+), 19% medium-term (2-5Y), 4% short-term (≤1Y) | Japan avoids refinancing "walls" where massive amounts mature simultaneously |
| Annual Refinancing Need | ~$9 trillion/year (25% of outstanding) |
~¥160 trillion/year (12% of outstanding) |
U.S. must refinance 13% more of its debt annually = higher rollover risk |
| Average Issuance Cost (2024) | 4.5% weighted average | 0.9% weighted average | Japan's ultra-low rates (BOJ support) keep debt service manageable despite high debt stock |
| Annual Debt Service Cost | $1.0 trillion (13% of budget) |
¥25.2 trillion (22% of budget) |
Japan pays higher % of budget despite lower rates due to massive debt stock. But stable due to long maturities. |
| Interest Rate Risk Exposure | HIGH 1% rate rise = +$360 billion annual cost within 3 years |
LOW 1% rate rise = +$110 billion annual cost over 9+ years |
Japan's longer maturity insulates budget from rate shocks. U.S. vulnerable to rapid refinancing at higher rates. |
| Largest Creditor | Foreign holders (30%): China, Japan, UK | BOJ (55%) + Domestic banks/insurance (35%) | Japan's domestic creditor base = no capital flight risk. U.S. vulnerable to foreign divestment. |
| Issuance Strategy Philosophy | "Minimize cost, manage liquidity" (focus on 2Y, 5Y, 10Y, 30Y benchmarks) |
"Stability over cost" (deliberate ultra-long issuance even when expensive) |
Japan explicitly sacrifices short-term savings for long-term stability. U.S. prioritizes market efficiency. |
Japan's higher debt-to-GDP ratio (264% vs 123%) looks scarier on paper, but its debt management structure is arguably more sustainable than the U.S. due to: (1) longer average maturity reducing refinancing frequency, (2) domestic creditor base eliminating capital flight risk, (3) BOJ backstop keeping rates ultra-low, and (4) deliberate "stability over cost" philosophy spreading refinancing over decades rather than concentrating it.
The U.S. situation in 2025 is a real-world lesson in why the MOF's "stability over cost" philosophy exists: short-term savings on cheap debt can turn into a fiscal disaster when rates inevitably rise and you're forced to refinance at the worst possible time.
Risk of an Unstable Strategy
If the MOF failed to prioritize stability and only issued cheap, short-term debt, it would create massive refinancing risk. Imagine if Japan's entire ¥1,100 trillion debt was in 1-year bills. Every single year, the MOF would have to successfully re-issue that entire amount. If a financial crisis hit at the same time, investors might demand 5% or 10% interest, and the government would have no choice to pay, instantly straining the national budget.
By issuing across the entire yield curve (from 2 years to 40 years), the MOF ensures that only a manageable portion of the total debt comes due each year, making the entire system far more stable.