Buyers flee Japanese bonds as political, fiscal risks rise

Reuters

6 days ago

TOKYO, July 23 (Reuters) - Japanese government bonds tumbled on Wednesday, sending benchmark yields to near 17-year highs, as traders priced in increased political risks and a hazy outlook for the central bank's policy normalisation path.
In a sign of how nervous markets are, the Ministry of Finance's first sale of super-long government debt since a bruising electoral defeat for Prime Minister Shigeru Ishiba logged the weakest demand in almost 14 years.
In a whirlwind day of news, the United States and Japan announced a trade deal, speculation swirled that Ishiba planned to resign, and a Bank of Japan (BOJ) official warned of an economic slowdown.
The 10-year JGB yield jumped as much as 10 basis points (bps) to 1.6%, marking its biggest move in months and the highest level since October 2008.
Super-long term JGB yields hit record highs in May and are back near those levels as concerns mount over Japan's precarious finances.
"We're seeing a possible buyers' strike playing through," said Chris Weston, head of research at broker Pepperstone.
"Inflation is running far too hot for where interest rates are. The question is why would you buy at these levels?" he said, adding he expected the selloff could extend to UK gilts too.
Sunday's defeat for Ishiba's Liberal Democratic Party and coalition partner Komeito follows their loss of a majority in the more powerful lower house last year. Opposition parties have advocated for tax cuts and increased government spending to help households deal with inflation.
Ishiba plans to resign, a source close to the prime minister said. Local media reported the move could happen by the end of next month. However, the prime minister later said there was no truth to the media reports about his intentions.
"Attention will soon turn to the next prime minister's policy agenda and any signals of recalibration from the BOJ as JGB yields climb," said Charu Chanana, chief investment strategist at Saxo.
After the election defeat, investors expect whoever replaces the fiscally conservative Ishiba will support calls for more government spending, widening an already bloated fiscal deficit at nearly 2-1/2 times the size of Japan's economy.
The election result also puts the Bank of Japan in a double bind as prospects of increased spending could keep inflation elevated while potentially prolonged political paralysis and the impact of the trade war provide compelling reasons to go slow on rate hikes.
"The market's first instinct was to mark up political risk premia," said Shoki Omori, chief desk strategist at Mizuho Securities, referring to reports of Ishiba's resignation.
Investors may struggle to position for the uncertainties around the multiple risks, and "consequently, the super-long sector may continue to exhibit subdued conditions through August, and possibly into September," he said.
Ten-year Japanese government bond futures tumbled as much as 1.06 yen to 137.54 yen, their lowest since March 28.
Japan's finance ministry has scaled back its issuance plan for super-long bonds in response to the surge in JGB yields and poor demand at auctions.
The central bank is due to meet again on policy next week. BOJ Deputy Governor Shinichi Uchida said that the trade deal with the U.S. reduces uncertainty, after earlier warning that economic activity and prices were skewed to the downside.
($1 = 147.0300 yen)