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Japan’s ultra-long-term borrowing costs have risen above 4 per cent for the first time, as traders sell the country’s debt ahead of a snap election that could hand Prime Minister Sanae Takaichi a mandate to accelerate her stimulus plans.
Yields on 40-year Japanese bonds surged 0.26 percentage points to 4.2 per cent on Tuesday, crossing above 4 per cent for the first time since their introduction in 2007 and pushing up borrowing costs around the world.
A day earlier, Takaichi said she intended to dissolve parliament and hold an election on February 8, calling on Japan to give her a mandate for “major policy change” and fuelling expectations for a loosening in the public finances.
Bond yields have been rising, reflecting a fall in the price of the debt, since the prime minister unveiled a $135bn fiscal spending plan in November. Takaichi on Monday also confirmed her intention to suspend Japan’s 8 per cent sales tax on food for two years. That has fuelled investors’ concerns about Japan’s mixture of high debt and rising yields.
“Debt is 200 per cent of GDP and the government is seeking to expand fiscal spending,” said Yuxuan Tang, head of Asia macro strategy at JPMorgan Private Bank. “That will add to the premium investors require to own the long end of JGBs.”
While short-term government debt is more closely tied to the path of central bank policy rates, ultra-long-term debt is more susceptible to supply and demand pressures. Governments around the world have seen a steep rise in the costs of their long-term sovereign borrowing in recent years, amid record global supply and waning demand from traditional buyers such as life insurers and pension funds.
“You’re starting to get quite dislocated price action,” said Vincent Chung, a fixed-income portfolio manager at T Rowe Price. “There is no strategic buyer in the long end.”
Investors have been warning of the knock-on effects for global markets of rapidly rising Japanese yields. Thirty-year US Treasury yields rose 0.09 percentage points on Tuesday to 4.93 per cent, their highest level since last September, compounded by concerns over US foreign policy.
An auction of 20-year Japanese bonds on Tuesday drew relatively weak demand, with a bid-to-cover ratio of 3.19, lower than the 12-month average.
In the face of rising yields, Takaichi has been at pains to signal to voters and financial markets that her plans for more spending and tax cuts will not strain Japan’s public finances.
On Monday, she vowed to lower Japan’s gross debt-to-GDP ratio, which reached as high as 250 per cent last year, according to some estimates.
Japan’s finance minister Satsuki Katayama said at the World Economic Forum in Davos on Tuesday that the debt-to-GDP could be reduced through a mixture of “wise spending” and “strategic fiscal measures” to boost potential growth.
“This will bring about the sustainability of public finances and ensure trust from the markets,” she added, according to prepared remarks.
Despite their efforts, analysts at Japanese bank SMBC said traders were largely positioned around the “Takaichi trade”, with expectations that the yen and government bond prices will fall while bank stocks will gain from fiscal stimulus and higher interest rates.