Fears mount over rising longer-term yields ahead of Japan's national election

The Mainichi

4 days ago

TOKYO (Kyodo) -- Concerns are mounting that Japan's longer-term interest rates may rise further, as lawmakers' campaign pledges to tackle rising prices draw renewed attention to the country's already dire fiscal health ahead of the upcoming national election.
While Japan's economic growth could slow amid higher U.S. tariffs, dampening tax revenue, the ruling and opposition camps are both pitching measures to curb the negative impact of cost-push inflation, including cash handouts and a consumption tax cut.
Analysts warn that implementing such steps without credible funding sources could erode trust in Japan's finances, making investors more reluctant to boost their holdings of government debt. Japan's fiscal position is already the worst among major economies.
Government bonds with maturities of 20 years or more are classified as super-long-term debt. Earlier this year, yields on 30-year Japanese government bonds hovered at their highest levels in around 25 years. Bond yields move inversely to prices.
The Bank of Japan could become another culprit driving up long-term interest rates, as it has been tapering its purchases of government bonds -- a move that could relatively amplify the influence of foreign investors and disrupt debt market stability.
If super-long-term bond yields keep climbing, Japan may face ballooning debt-servicing costs, threatening fiscal sustainability. Deteriorating investor confidence could trigger further bond sell-off and raise borrowing burdens for infrastructure and welfare programs.
After the central bank ended its policy of controlling long-term yields, overall trading activity in the country's bond market has been increasing, driven by participants from abroad, said Koji Takeuchi, senior economist at Mizuho Research & Technologies Ltd.
"Markets dominated by overseas players are prone to greater price volatility," he said. "To guard against such risk scenarios, the government should continue signaling to markets that it remains committed to fiscal discipline."
In Japan, around 90 percent of government bonds are purchased by domestic financial institutions, but the share held by buyers from other nations has expanded in recent years as the Finance Ministry has sought to diversify the investor base.
As super-long-term bonds have a long maturity period, risk factors, such as worries about government finances, are reflected in their yields. Japan's public debt has topped 1,300 trillion yen ($9 trillion), or well over 200 percent of its gross domestic product.
Prime Minister Shigeru Ishiba warned in May that Japan's fiscal situation is "undoubtedly extremely bad. It is worse than Greece's." Greece's fiscal crisis resulted in economic stagnation across much of Europe in the early 2010s.
In the run-up to the House of Councillors election on July 20, many opposition parties have urged the government to reduce or abolish the politically sensitive consumption tax, although they have not clarified how they would make up for the lost revenue.
The ruling Liberal Democratic Party, led by Ishiba, has ruled out cutting the consumption tax rate to ensure resources for social security, but it has promised to provide 20,000 yen in cash handouts.
The coalition of the LDP and its junior coalition partner Komeito holds a majority in the upper house, but it became a minority in the more powerful House of Representatives after suffering a crushing defeat in the general election late last year.
If the ruling bloc loses its majority in the upper house as well, the consumption tax cut advocated by the opposition could become more likely, said Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management Co.
Such a policy shift, he added, could cast doubts on the outlook for Japan's fiscal condition and "add upward pressure" on longer-term interest rates. According to the Finance Ministry, national consumption tax revenue totals around 20 trillion yen annually.
In May, the yield on the 40-year Japanese government bond briefly spiked to 3.336 percent, a record high since its auction began in 2007, surging from 2.583 percent at the opening of this year's market on Jan. 6., the ministry said.
After the development, the BOJ, Japan's biggest government bond holder, opted in the following month to slow the pace of its debt-buying reduction from next year, in a bid to contain broader market turbulence from rapid tapering.
That same month, the Japanese government decided to scale back issuances of super-long-term bonds from July, in a rare mid-fiscal-year revision of its original program, in consideration of weak investor appetite for the debt.
But longer-term interest rates are "likely to stay elevated for the foreseeable future" as speculation about additional government bond issuance might linger even after the upper house election, said Tsuyoshi Ueno, senior economist at NLI Research Institute.
The easing of U.S. tariffs in some major economies is expected to prompt market participants to take on more risk and sell safe-haven assets, Ueno said, adding the BOJ's cutback in bond purchases may also affect the debt's supply-demand balance.
(By Risako Nakanishi)