Well Spent

Japanese Markets Face Triple Pressure as Takaichi Victory Fuels Fiscal ⁣Concerns

A confluence of factors is creating turbulence in‍ Japanese financial markets following Sanae Takaichi’s victory in the Liberal Democratic Party (LDP) presidential election. A selloff⁤ across stocks, ‍bonds, and the yen is raising concerns about the potential cost of economic measures under a Takaichi governance and the Bank of Japan’s (BOJ) future monetary policy.

The yield on Japan’s 30-year government bond briefly surpassed ‌that of its German counterpart,despite‌ Germany’s recent increase in fiscal spending.‌ This indicates ⁣growing investor apprehension. The spread between the 30-year japanese bond yield and the BOJ’s policy ⁤rate currently stands at approximately 2.8 percentage points – significantly higher than the 1.35 percentage ⁢point spread seen with German bonds and the European⁢ Central Bank’s (ECB) policy rate. This suggests investors are demanding a larger premium to hold Japanese debt, ⁢reflecting increased risk perception. The 30-year ‌bond⁢ yield rose by 1 basis point (0.01%) promptly following Takaichi’s win.

The pressure isn’t limited to ultra-long-term bonds. Analysts predict increased selling pressure on bonds with maturities ranging from 5 to 10 years.Taketomo ​Shimizu, CIO⁢ for fixed⁤ income at Asset Management One, has already moved to an underweight position ⁣in stocks across the⁢ medium to long-term investment horizons.

Concerns extend to ⁣potential capital flight, echoing the ⁤2022 crisis in the UK where a large-scale tax​ cut plan under the Truss government triggered a collapse in British bond prices and the pound’s exchange rate. Deutsche Bank’s head of foreign⁣ exchange research,George ‍Saravelos,highlighted this risk.

Data from the Japan Securities Dealers Association reveals a‌ critically important shift in​ investor behavior. Net ‍purchases of 10-year government bonds have ⁢fallen to their lowest ​level as October 2023, indicating growing caution among major investors including domestic banks, insurance companies, and foreign entities.

Adding to the downward pressure‍ on‌ the yen is the widespread expectation that the BOJ will maintain ⁣its current low interest rate policy at its December meeting. The market now assigns an‍ approximately 80% probability to⁢ this outcome, a dramatic shift from the 30% probability of ⁢a rate hike‌ that existed before Takaichi’s election victory.

Takaichi and her advisors ‌are advocating for continued low interest rates to stimulate economic growth. Though, many investors believe that maintaining this policy would ⁤exacerbate yen depreciation and fuel inflationary pressures, ultimately‌ hindering economic recovery. ‍

Portfolio manager at First Eagle Investments, Idana Appio, argues that‍ the Japanese economy is ⁤performing well despite challenges like ‍tariffs, and that‍ current inflation levels do not necessitate large-scale fiscal stimulus.

Coverage cooperation:⁤ Eru Ishikawa and Masaki Kondo