(Nov 17): Japan’s longer-maturity sovereign bonds fell sharply over renewed fiscal concerns ahead of the government’s first economic package expected to be unveiled as soon as this week.
The drop in the nation’s bonds echoed volatility in US and UK markets, where jitters remain after a slump late last week. Japan’s 20-year bond yield jumped to its highest level since 1999 on Monday, and the 30- and 40-year rates climbed about five basis points.
Traders are focused on the figure for actual spending in Prime Minister Sanae Takaichi’s economic plan as they weigh the risk that rising debt issuance may threaten market stability in Japan. Gross domestic product data on Monday supported Takaichi’s case for an ambitious stimulus package even as the central bank stays on track for a rate hike in coming months.
“Investors are wary about the scale of the government’s economic stimulus package,” said Naoya Hasegawa, the chief bond strategist of Okasan Securities Co. “Uncertainty about its impact on government bond issuance is putting selling pressure on the longer-term zone.”
Concerns over Japan’s fiscal policy add to Takaichi’s headache as she faces a host of tests from the market only about a month into her role. The weaker yen is fuelling a debate over the possibility of intervention from the nation, while some of Japan’s biggest tourism and retail-related stocks slumped after Beijing warned its citizens against travelling to and studying in the country amid a deepening diplomatic dispute.
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Local media reports have said that Takaichi’s administration is mulling an extra budget for the current fiscal year that would be larger than last year’s JPY13.9 trillion ($116.89 billion) to fund more spending. This underscores the new premier’s approach to what she calls “responsible and expansionary finance”, signalling her readiness to lean more heavily on fiscal policy to support growth.
“Takaichi is getting into a tough spot,” said Shotaro Mori, a senior economist at SBI Shinsei Bank Ltd. “She has talked about an aggressive fiscal spending as a pillar of her economic policy but she has to be careful to maintain trust from financial markets.”
“At the same time, if the economic package is too small, that would disappoint many investors,” Mori added. “A key point is whether she can show a credible fiscal plan while bolstering spending.”
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While the escalation in China’s confrontation with Japan hasn’t been the driver in the bond market moves, it adds a layer of uncertainty going forward, according to strategists.
“If diplomatic missteps — such as a decline in Chinese tourist inflows — begin to weigh visibly on the economy and erode the administration’s approval ratings, Takaichi may feel compelled to push even more aggressively for fiscal expansion to shore up voter support,” said Ryutaro Kimura, a senior fixed-income strategist at AXA Investment Managers Ltd.
Goldman Sachs Group Inc said that Japan’s fiscal risk premium is making a comeback as investors grow wary of a larger-than-expected stimulus package, putting pressure on longer-maturity sovereign bonds and the yen. The political backdrop is making investors increasingly worried about a 20-year debt sale on Wednesday, as well as for a 40-year bond auction next week.
Renewed fiscal expansion worries and soft overseas demand mean that pressure on longer-maturity bonds is likely to remain into the supply, Morgan Stanley strategists including Koichi Sugisaki wrote in a note.
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