Japan’s long-term bond yields surge as looming election triggers fiscal worries
Japan’s long-term government bond yields surged to multi-year highs Tuesday, spurred by fears that an upcoming election could lead to a consumption-tax rate cut that might worsen the country’s public finances.
Japan’s long-term government bond yields surged to multi-year highs Tuesday, spurred by fears that an upcoming election could lead to a consumption-tax rate cut that might worsen the country’s public finances.
A key focus of the campaigning will be a potential cut to Japan’s consumption tax, as both ruling and opposition parties seek to win over voters with measures to alleviate the burden of rising living costs.
Prime Minister Sanae Takaichi has already said that her party is mulling a plan to suspend the sales tax on food and beverages for two years. On Monday, she confirmed plans to dissolve the lower house of parliament, saying that official campaigning will start on Jan. 27 and voting on Feb. 8.
Such a tax cut could take a big chunk out of government revenue, potentially raising alarm about the sustainability of Japan’s sizable debt.
A consumption tax cut could cost around $31 billion annually in revenue, so how they are funded will be important for markets, MUFG Bank’s senior currency analyst Michael Wan said in a note.
“Even if the consumption tax cut is said to be temporary, the risk of it becoming permanent is high and the burden on public finance is significant," Citi Research rates strategist Tomohisa Fujiki said in a report.
And if the tax cut coincides with expanded defense spending—another of the Takaichi administration’s policy aims—Fujiki sees a risk that yields on Japanese government bonds could rise to levels where concerns over debt sustainability will intensify.
Japan’s bond markets have been signaling worries about more aggressive fiscal stimulus since Takaichi took power in October, and a victory by the ruling Liberal Democratic Party in the election could add to those concerns.
On Tuesday, the yield on 10-year JGBs rose 4 basis points to 2.310% after earlier touching 2.330%—the highest since February 1999, according to data provider Quick. The 20-year yield climbed 9.5 basis points to 3.350% and the 30-year yield jumped 10 basis points to 3.710%. The 40-year yield rose 6 basis points to 4.005%, a peak not seen since at least 2015, Quick data showed.
For Masahiko Loo, senior fixed income strategist at State Street Investment Management, the rise in ultra-long JGB yields partly reflects fresh repricing of term and risk premium as markets absorb a more expansionary fiscal stance and persistent inflation.
Analysts say a consumption-tax cut could also have implications for the Bank of Japan.
After raising its policy rate to the highest in three decades in December to curb accelerating inflation, the central bank is widely expected to stay on hold when it announces its decision on Friday.
Reducing the tax rate on food to zero could lower consumer inflation and boost gross domestic product growth, DBS Group Research’s Ma Tieying said in commentary.
That could create a “goldilocks" growth‑inflation dynamic, but one accompanied by a wider fiscal deficit, the senior economist added.
However, Takaichi seems to be taking the financial market response into account, MUFG Bank’s Wan said, “and fiscal concerns may abate over time assuming election uncertainty fades."
Write to Ronnie Harui at ronnie.harui@wsj.com
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