Japanese Bond Market Hammered by Takaichi's Spending Vows

Japanese Prime Minister Sanae Takaichi’s announcement of a snap election in just over two weeks has hit the government’s bond market hard.

Investors are not impressed with plans to cut taxes, stimulate the economy and raise spending on defence, given the country has one of the world’s biggest debt levels.

Her promise to match her political rivals by suspending a food levy for two years that could cost the government 5 trillion yen ($32 billion) in annual revenue caused bond markets to crater on Tuesday.

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Yields on 20-year, 30-year and 40-year bonds hit record highs, as dealers said they had no buyers. Analysts say it was a blunt vote of no-confidence in the country’s economic plans.

Ten-year yields have jumped by 18.5 basis points in ‌two days, the sharpest rise since Japan loosened a cap on the benchmark bond yield in 2022.

And 20-year yields are up a remarkable 28 bps this week to a record-high above 3.4%, while 30-year and 40-year yields have shot up by 40 bps, breaching 3.8% and 4% respectively.

Analysts say the election has become like a race to see who can spend the most.

“Takaichi’s election gamble and the talk of food tax cuts and fiscal expansion have changed the narrative very quickly,” Tareck Horchani, head of prime brokerage dealing at Maybank Securities in Singapore, told Reuters, noting that Japan’s 30-year yield is now 35 bp higher than that of Germany.

“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.”

Stock market also faltering

Tuesday’s bond market meltdown came with a pullback in the stock market after months of pressure on the yen.

Investors have been pulling back as interest rates have started to rise amid uncertainty on how high they might go.

Inflation has also been above the Bank of Japan’s target for nearly four years, so Takaichi’s spending vows have created concern that things could get out of hand. Those concerns have weighed on the currency.

But the fallout 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.

The 31 bp rise in 10-year bond yields would be the sharpest monthly rise in more than two decades, if sustained.

Global bond markets were also rattled on Tuesday, with selling in European and US debts. US President Donald Trump’s threat to take control of Greenland has sent the price of gold and silver soaring amid the latest surge of geopolitical volatility.