Japan’s Bonds Face ‘Vigilante’ Test as Sanae Takaichi Set to Become PM
Japan’s Bonds Face ‘Vigilante’ Test as Sanae Takaichi Set to Become PM
Sanae Takaichi’s recent victory in the Liberal Democratic Party leadership race and her impending confirmation as Japan’s first female prime minister on October 15th have sent shockwaves through the country’s government bond market. Markets are bracing for a more expansive fiscal policy under Takaichi, a staunch proponent of “Abenomics,” the economic strategy favoring aggressive spending and loose monetary policy.
The immediate market reaction was stark. On Monday, Japan’s 30-year bond yield surged over 13 basis points to 3.291%, nearing last month’s all-time high. The 20-year debt yield also climbed to 2.7%, its highest since 1999. This sharp increase, which saw yields rise over 100 basis points this year, signals investor concern over potential fiscal loosening and a slower Bank of Japan (BOJ) hiking cycle.
Analysts from Goldman Sachs predict “upside risks to long-end JGB yields,” suggesting a plausible 10-15 basis point jump in 30-year yields as an initial response. The prospect of Takaichi’s “high-pressure economy” – aiming to stimulate growth through public-private investment and aggressive fiscal support – threatens to exacerbate Japan’s inflation challenges and is unnerving bond investors. William Pesek, a veteran Japan observer, warned that efforts to “open up the fiscal floodgates” could lead to a “very interesting battle between Tokyo and the bond vigilantes.”
The market’s bets on a BOJ rate hike this October now appear uncertain, prompting Deutsche Bank to exit its long-Japanese Yen trade amidst “too much uncertainty around Takaichi’s policy priorities and the timing of the BOJ hiking cycle.” This volatility in long-term JGBs is even creating “bearish shocks” for global long-end bonds, with Goldman Sachs estimating a 10 basis point JGB shock could translate to 2-3 basis points of upward pressure on US, German, and UK yields. Japan’s bond market, long shielded by the BOJ’s yield curve control, now faces a significant test under its new leadership.
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