After hitting global markets in August, Japan once again auctioned a large number of government bonds

The Japanese government will auction key 10-year and 30-year bonds this week.Demand for JGBs has been tested again.Japan's finance ministry is scheduled to sell 10-year bonds worth 2.70 trillion yen on Tuesday and 30-year bonds worth 900 billion yen on Thursday.

The offering comes as investors focus on the extent to which the Bank of Japan is willing to let yields rise following a YCC change at the end of July. Traders are looking for signs,See if Japanese domestic yields are high enough to prompt investors to increase their holdings of domestic bonds and sell overseas assets such as U.S. Treasuries.

The return of funds could exacerbate this year's global bond sell-off.The European Central Bank said in May that Japan's abandonment of low interest rates could test the resilience of global debt markets. Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank, said:

"As long-term yields rise in the US, especially after the Bank of Japan gives more flexibility, investors are likely to seek higher yields. While ultra-long-term yields have risen, they are not high enough to encourage big purchases by life insurers and pension funds."

She added,Traders are more concerned about the outcome of this week's auction of Japanese 30-year bonds than the outcome of the sale of 10-year bonds.

What is the impact of the decline in demand for Japanese bonds?

The decrease in demand for Japanese government bonds reflects theThe Bank of Japan will face major challenges in unwinding its ultra-loose policy in the future.Rising interest rates will lead to higher borrowing costs, and if it also triggers a stronger yen,That could put pressure on Japan's exporter-dominated stock market.

Rising yields also meanThe government's debt service costs will rise next year.It is said that the cost of the Japanese government's budget application next year will increase by 11.5% compared with last year, reaching 28.10 trillion yen.

Japan's deteriorating fiscal position will weigh on investor confidence in long-term bonds, but the way its bond auction system is structured means the auction will not fail. The finance ministry has asked 20 major dealers, including Japanese banks, brokerages and their foreign counterparts, to each bid for at least 5 per cent of planned issuance if needed, meaningThere will never be a shortage of demand when the government provides JGBs.

Will yields rise again?

Despite this, Japan's bond auction last month still highlightsWeak demand as investors wait for higher yields.At that time, the difference between the average price and the cut-off price in the 20-year Treasury auction was the largest since 1987, indicating thatInvestors' interest in bonds has declined.That sent the 20-year Japanese bond yield higher in the following days, reaching a seven-month high of 1.42% on August 23.

In addition, last week's two-year bond sale saw the emergence ofThe lowest bid coverage rate since 2010This is another sign of weak demand.

Japan's 10-year bond yield traded around 0.64 per cent on Tuesday after hitting a nine-year high of 0.675 per cent on August 23.Industrial foreign exchangeTraders have been testing whether the Bank of Japan still wants to prevent yields from rising too quickly after adjusting the YCC, with the yield on the 30-year bond climbing to a more than seven-month high of 1.69 per cent on August 23 and stabilising around 1.60 per cent on Monday.

Shoki Omori, chief strategist at Mizuho Securities, said:As long as 10-year yields remain near current levels, "the market may only see demand for short cover".He believes that the current market wariness will continue until market participants see the results of auctions throughout September.