By Tom Westbrook
SINGAPORE, Jan 20 (Reuters) – Japan’s government bonds are in free fall as investors take a dim view of an atmosphere of competitive spending on the hustings, where politicians are jostling to cut taxes in an economy with the heaviest debt burden in the developed world.
Prime Minster Sanae Takaichi called a snap election on Monday and is running on a platform of stimulus to drive a return to inflation and growth after decades of stagnation.
But she launched her campaign – echoing opponents – with a vow to suspend a food levy for two years, and bond markets baulked at the vagaries of how any election winner could pay for the estimated 5 trillion yen ($32 billion) hit to annual revenue.
There were no buyers, dealers said, so 20-year, 30-year and 40-year yields rocketed to record highs in a rout reminiscent of the 2022 collapse in British gilts and a warning for market confidence in Japan’s balance sheet.
PARTIES IN RACE TO PLEDGE MORE SPENDING
“Markets (are) digesting the idea that all parties in Japan are in a race to see who can promise to spend more money,” said Ales Koutny, head of international rates at Vanguard in London.
“As we saw with the UK, markets at some point just have enough and start to demand much higher financing costs.”
And those costs are surging on the implications for an economy that had grown accustomed to cheap money.
Ten-year yields have leapt 18.5 basis points in two days, the sharpest rise since Japan loosened a cap on the benchmark bond yield in 2022.
Twenty-year yields are up a staggering 28 bps in two days to a record-high above 3.4% and 30-year and 40-year yields have shot up by 40 bps, breaching 3.8% and 4% respectively. [JP/]
‘REGIME-STYLE REPRICING OF THE LONG END’
“Takaichi’s election gamble and the talk of food tax cuts and fiscal expansion have changed the narrative very quickly,” said Tareck Horchani, head of prime brokerage dealing at Maybank Securities in Singapore.
Japan’s 30-year yield is now 35 bp higher than that of Germany, he noted.
“The market is no longer treating super-long JGBs as an anchored asset, they’re being repriced closer to global fiscal-risk curves,” he said.
“This isn’t just a technical selloff, it’s a regime-style repricing of the long end, driven by politics, positioning, and a structural buyer vacuum.”
CONCERNS THAT SPENDING MAY GET OUT OF HAND
Moves in the bond market extended sharply after demand faltered at a 20-year auction on Tuesday morning, and came in tandem with a pullback in the stock market and months of pressure on the currency, stoked by fiscal worries.
Investors have been backing away from such tenors for years as interest rates have started to rise and nobody is certain how far they need to climb.
At the same time, inflation has been running above the Bank of Japan’s target for nearly four years and Takaichi’s platform of more spending is driving worries it gets out of hand and has been pushing down on the currency.
“Who is the natural buyer for all these JGBs that have been issued?” said Ian Samson, a multi-asset portfolio manager at Fidelity International.
“A portfolio manager like me looks at inflation still way above target, the Bank of Japan moving very, very slowly, an increasing lack of credible monetary or fiscal anchor and clearly aren’t willing to step in.”
GOVERNMENT KEEPING CLOSE EYE ON LONG-TERM RATE MOVES
To be sure, beyond investors’ discomfort with the spending plans, the fallout in financial markets from the rout may be contained. The longest-dated debt is heavily owned by insurers who hold it against long-term liabilities and tend to keep it until it matures.
Japan’s chief cabinet secretary said on Tuesday the government was watching long-term rates moves closely.
Moves in 10-year bond have also been unsettling. A 31 bp rise in the yield so far this month, if sustained, would be the sharpest monthly rise in more than two decades and points to a painful adjustment permanently higher in borrowing costs.
The yen has been sliding since Takaichi took charge of Japan’s ruling party and global bond markets were also rattled on Tuesday, with selling in European and U.S. debts. [GVD/EUR]
And with three weeks left in the campaign, analysts think a circuit breaker will be hard to come by and that it’s unlikely that politicians will go out on a limb to soothe markets.
“The bottom line is no one wants to buy or catch the falling knife at this point,” said Naka Matsuzawa, chief macro strategist at Nomura Securities in Tokyo.
“There’s no buyers on the level of the market.”
($1 = 158.1000 yen)
(Additional reporting by Rocky Swift and Junko Fujita in Tokyo; Editing by Bernadette Baum)
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