Japan bond yields hit new highs as investors fret over fiscal policy risks

The slump in Japanese bonds deepened Tuesday, sending yields soaring as investors gave a thumbs down to Prime Minister Sane Takaiichi’s election pitch to cut taxes.

 

The 40-year rate rocketed past 4 per cent to a fresh high since its debut in 2007 and a first for any maturity of the nation’s sovereign debt in more than three decades. The jump in 30- and 40-year yields was more than 25 basis points, the most since the aftermath of President Donald Trump’s Liberation Day tariffs on Japan in April last year.

 

A lacklustre auction of 20-year earlier underscored broader worries over government spending and inflation. Treasuries, already under pressure on concerns that tariffs may dim the allure of US assets, extended declines as the selloff in Japanese bonds accelerated.

 

Since Takaichi took office, the 20- and 40-year yields have risen about 80 basis points. Investors are on guard for moves in Japan spilling over into global markets amid the prospect of continued volatility in Tokyo trading ahead of the snap poll Takaichi is scheduled for February 8.

 

“There is no clear funding source for the consumption tax cut, and markets expect it to be financed through government bond issuance,” said Yukio Fukumoto, senior financial researcher at NLI Research Institute. “The bond market is effectively the canary in the coal mine,” Fukumoto said, adding that “it’s hard to see a scenario where borrowing makes sense.”

 

The Japanese government has played down the sudden meltdown. “Long-term yields on various factors and are determined in the market so I’ll refrain from commenting on them,” a close eye on markets, said spokesperson Minoru Kihara. “We’ll make sure to gain market trust through a sustainable fiscal policy, making our economy strong and bringing the debt-to-GDP ratio.”

 

The Finance Minister Satsuki Katayama, speaking on a panel at the World Economic Forum in Davos, said the government is trying to maintain fiscal sustainability.

 

The surge in yields marks a shift that’s been going on in Japan’s bond market, where years of ultra-low official interest rates had kept yields well below those of global peers. The nation’s 30-year bond yield has surpassed Germany’s rate of that tenor, which sits at around 3.5 per cent. “The 40-year yield above 4 per cent is the highest since its debut and significantly above Germany’s longer bonds — offers increased value for bond investors,” said Masahiko Koo, senior fixed-income strategist at State Street Investment Management.