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Japan’s long-term borrowing costs have surged to their highest in decades, in an intensifying “Takaichi trade” that the new administration will unveil a much larger fiscal spending package than originally expected.
Yields on the benchmark 10-year bonds, which move inversely to price, climbed as much as 0.04 percentage points to 1.78 per cent on Wednesday — the highest level since June 2008 in the global financial crisis — before falling back to 1.76 per cent.
The sell-off extended to longer-dated notes. Yields on 30-year JGBs rose to a record intraday high of 3.35 per cent.
Driving the rise in JGB yields, said traders, were signs that the government of Prime Minister Sanae Takaichi was preparing a huge supplementary budget of at least ¥25tn ($161bn) as she seeks to make good on pledges to boost the economy and protect households from rising prices.
“There is a fear in the market that the stance of the government is now pretty dovish. It may be an overreaction today, but the market clearly thinks that the government is going to have to issue longer-dated bonds to fund its spending plans,” said Shoki Omori, chief desk strategist at Mizuho.
Investor appetite was solid for a 20-year government bond auction, however, with the bid-to-cover ratio — a proxy for demand — slightly below the 12-month average. It was “soft, but certainly not disastrously so”, one investor said.
Initial signals had been that the supplementary budget, which is expected to be unveiled this week, would come in around ¥14tn, or about the same level as last year’s ¥13.9tn. Subsequent comments from officials suggested it could be expanded to ¥17tn.
On Tuesday, a panel within Takaichi’s ruling Liberal Democratic party proposed a ¥25tn budget, spooking investors who think the spending plans will need to be funded with more sovereign bond issuance.
Traders in Tokyo said there was a growing feeling that Japan’s macroeconomic picture was becoming “messier” — a sentiment expressed not just in JGB yields, but also in currency markets, where the yen continues to slide against the dollar. The currency has weakened past ¥155 to the dollar this week for the first time since February.
Kazuo Ueda, the Bank of Japan governor, is due on Wednesday to meet the finance and economic revitalisation ministers in a relatively unusual gathering, which analysts said had further clouded the picture for investors.
Stephen Spratt, a rates strategist at Société Générale, said that the moves in JGBs were closely tied to the rapidly changing signals on Takaichi’s agenda.
Shortly after she became prime minister in October, Japanese bond yields rose as investors anticipated huge fiscal spending plans.
“Now we have reached the point of actual policy implementation, and the market is expressing concerns about fiscal risk. It now seems likely that, if the supplementary budget is the size they are now talking about, Japan will have to issue more bonds,” said Spratt.
The rise in yields on long-dated JGBs follows a two-year rout as investors respond to the revival of inflation, rises in interest rates and a softening in demand among traditional buyers.
The 30-year JGB yield is up 1 percentage point this year, while the yields on US Treasuries of the same maturity have dipped slightly in the same period.
JGB yields have long set a baseline for global debt markets because of the country’s ultra-loose monetary policy and negligible inflation. Falling prices for JGBs have added to recent concerns over debt sustainability, fund managers say.
“We saw earlier this year how contagion can rapidly spread from the JGB long end to other markets,” said Mike Riddell, a fund manager at Fidelity International, referring to a sell-off in global debt markets in May.
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