(Jan 20): Investors are on tenterhooks ahead of an auction of 20-year Japanese sovereign bonds Tuesday after the government’s plans for tax relief on food jolted the market.
Bonds slumped on Monday, sending yields of the 20-year and longer-term maturities soaring to multi-year highs. The auction result due around lunch time in Tokyo will be a test that shows whether the recent gains in yields are enough to offset worries that weakening government finances will hurt bonds.
“We now see a significant risk that expansionary fiscal policies will appear across party platforms for the lower house election,” said Barclays Securities’ strategists Ayao Ehara and Shinichiro Kadota in a note. “The auction immediately prior to last July’s upper house election produced lackluster results despite a rise in yields driven by concern about fiscal policies linked to party pledges. This precedent bodes ill” for today’s auction.
Japanese Prime Minister Sanae Takaichi officially called a Feb. 8 election during a briefing on Monday, and promised a temporary sales tax cut on food if she wins a fresh mandate for her new coalition. The Centrist Reform Alliance, a merger between Japan’s largest opposition party and a former ruling coalition partner, also aims to generate the financing needed to cut the sales tax on food to 0% through the management of a new government-related fund.
A poll by the Asahi newspaper conducted over the weekend showed that support for Takaichi remained high at 67%, with 52% saying that the ruling bloc should win a majority. While her strong approval ratings have led some investors to assume an easy victory, the formation of the Centrist Reform Alliance has increased the riskiness of the prime minister’s election gamble.
“Yields are likely to remain volatile until the election results are known,” said Takahiro Otsuka, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities Co. “The 20-year sector has not had firm supply-demand conditions, so the auction may be weak.”
See also: Japan parties jostle over food sales tax as election nears
On Monday, the 20-year bond hit 3.265%, the highest yield since 1999. The 30- and 40-year rates rose to their highest since inception.
Investors will also be watching the Bank of Japan’s policy decision on Friday for any hints about the central bank’s future rate-hike path. Officials are paying increasing attention to the yen’s potential impact on inflation, with possible implications for future rate hikes after a likely hold decision this week.
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