Japanese government bonds (JGBs) are facing a turbulent time as concerns about Prime Minister Takaichi’s stimulus package sent yields soaring to record highs. The super-long JGB yields, in particular, have hit an unprecedented level, causing a ripple effect across the market. But here’s where it gets controversial: some investors are questioning the timing and potential impact of this stimulus, while others are eagerly anticipating the economic boost it could bring.
The 40-year JGB yield jumped 8 basis points to 3.68%, and the 20-year yield touched 2.81%, the highest since July 1999. This surge in yields is a direct result of the market’s reaction to the anticipated stimulus package, which is expected to be significantly larger than initially thought. Japan’s yield curve has steepened sharply, reflecting the increased spending and potential delays in rate hikes from the central bank.
The market’s optimism about Prime Minister Takaichi’s spending plans has now turned to cautious anticipation. Naoya Hasegawa, chief bond strategist at Okasan Securities, notes that the size of the economic stimulus package is seen to be increasing, which could have implications for the 20-year JGB auction scheduled for Wednesday. If demand is weak, yields could rise further, creating a challenging environment for the auction.
The stimulus package, which Japan must compile to the tune of around 23 trillion yen, is expected to be funded through a combination of new bond issuance and tax and non-tax revenues. This combination, however, raises questions about the sustainability and potential impact of the stimulus on the economy.
As the market awaits further details on the stimulus package, investors are left to ponder the implications for the Japanese economy. Will the stimulus package be enough to reflate the economy, or will it lead to unintended consequences? The answers to these questions will likely shape the trajectory of JGBs and the broader market in the coming weeks.