Buyers flee Japanese debt as Takaichi hits the ground spending

Tom Westbrook

SINGAPORE, Jan 20 (Reuters) – Japanese government bonds plummeted as investors grew pessimistic about a competitive spending climate ahead of an election in which politicians race to cut taxes in the developed world’s most debt-burdened economy.

Japanese Prime Minister Sanae Takaichi called a snap election on Monday and ran on a platform of stimulus policies to push inflation and economic growth back after decades of stagnation.

But she launched her campaign, echoing her opponents, vowing to suspend food taxes for two years, while bond markets balked at the vagaries of how any election winner would pay for an estimated 5 trillion yen ($32 billion) in lost annual revenue.

Traders said there were no buyers, sending 20-, 30- and 40-year bond yields soaring to record highs, evoking the 2022 collapse of U.K. debt and warning of market confidence in Japan’s balance sheet.

All parties compete to pledge to increase spending

“The market is pricing in the idea that all parties in Japan are competing to see who can commit to spending more money,” said Ales Koutny, head of international rates at Vanguard in London.

“As we’ve seen in the UK, at some point the market has had enough and starts to demand higher funding costs.”

Those costs are soaring, impacting an economy accustomed to cheap money.

Ten-year Treasury yields surged 18.5 basis points in two days, the biggest jump since Japan relaxed its cap on benchmark bond yields in 2022.

The 20-year Treasury bond yield surged 28 basis points in two days, reaching a record high of over 3.4%, and the 30-year and 40-year Treasury bond yields surged 40 basis points, exceeding 3.8% and 4% respectively. [JP/]

“Long-end institutional repricing”

“Electoral gambling on the high side and talk of food tax cuts and fiscal expansion quickly changed things,” said Tareck Horchani, head of prime brokerage trading at Maybank Securities in Singapore.

He pointed out that Japan’s 30-year government bond yield is currently 35 basis points higher than Germany’s.

“Markets no longer view ultra-long JGBs as anchor assets and they are repricing closer to the global fiscal risk curve,” he said.

“This is not just a technical sell-off, this is a long-term regime-style repricing driven by politics, positioning and a structural buyer vacuum.”

Worry that spending may get out of control

The move in the bond market expanded sharply after demand fell at Tuesday morning’s 20-year Treasury auction, while stocks retreated and fiscal concerns stoked months of currency pressure.

Investors have been abandoning such maturities for years as interest rates began to rise and no one was sure how much they would need to rise.

Meanwhile, inflation has been above the Bank of Japan’s target for nearly four years, and Takao’s plan for more spending has stoked concerns about runaway inflation and has been weighing on the yen.

“Who are the natural buyers of all the JGBs that have been issued?” said Ian Samson, multi-asset portfolio manager at Fidelity International.

“Portfolio managers like myself believe that inflation remains well above target and the Bank of Japan is moving very, very slowly, increasingly lacking a reliable monetary or fiscal anchor and clearly unwilling to step in.”

The government pays close attention to changes in long-term interest rates

To be sure, in addition to investor jitters over spending plans, the fallout from the plunge in financial markets may also be contained. The longest-term debt is heavily held by insurance companies, who hold it as long-term liabilities and tend to hold it until maturity.

Japan’s Chief Cabinet Secretary said on Tuesday that the government is paying close attention to long-term interest rate trends.

The trend in the 10-year bond is also troubling. Yields have risen 31 basis points so far this month, which if sustained would be the biggest monthly rise in more than two decades and portend a painful permanent adjustment in borrowing costs.

The yen has been sliding since Japan’s ruling party took over, and global bond markets were also in turmoil on Tuesday, with European and U.S. bonds selling off. [GVD/EUR]

With three weeks left in the campaign, analysts believe circuit breakers will be difficult to implement and politicians are unlikely to take risks to calm markets.

“The bottom line is that no one is willing to buy or catch the falling knife right now,” said Naka Matsuzawa, chief macro strategist at Nomura Securities in Tokyo.

“There are no buyers in the market.”

(1 USD = 158.1000 yen)

(Additional reporting by Rocky Swift and Junko Fujita in Tokyo; Editing by Bernadette Baum)