A bird’s eye view of central Tokyo including Tokyo Tower at sunrise time.
Vladimir Zakharov | Moments | Getty Images
Japan’s 40-year government bond yield hit a record high on Tuesday as investors worried that a proposed cut in food sales taxes could worsen Japan’s fiscal situation amid a heavy sell-off in government bonds.
Long-term interest rates rose more than 5 basis points to 4%, the highest level since the introduction of 40-year maturities.
Short-term bond yields rose significantly as well. The yield on 10-year Japanese government bonds rose more than 6 basis points to 2.3%, the highest level since 1999, while the yield on 20-year government bonds rose about 9 basis points to 3.35%.
The decline came a day after Prime Minister Sanae Takaichi said he would dissolve parliament on Friday and call a snap election on February 8, setting the stage for a campaign expected to focus on economic policy.
“Very long-term government bond yields are rising not only due to structural supply-demand imbalances, but also due to new pricing in term and risk premiums as markets absorb more expansionary fiscal stances and sustained inflation,” said Masahiko Lu, senior fixed income strategist at State Street Investment Management.
This repricing has reinstated familiar market patterns, he added. “This has brought back the classic ‘high market trade’ dynamic of high Nikkei, government bonds and a weak yen,” Lu told CNBC.
This was a repeat of the volatile situation seen last October, when Japanese markets reacted to Takaichi’s comments and policy signals suggesting fiscal policy easing, but later stabilized, he added.
He added that the move does not signal any structural distress, but has strong technical and emotional implications.
Lu said the yield curve will likely remain steep into the first half of this year and stabilize as on-demand issuance patterns adjust and domestic banks return as buyers.
Similarly, analysts at Credit Agricole Corporate and Investment Bank said markets are increasingly pricing in a permanent shift to aggressive fiscal policy under Mr. Takaichi. They said the move to break away from what Takaichi called “the shackles of excessive austerity” could lead to a widening of the budget deficit.
