Japan’s 10-year government bond yield touched the highest level since 2008, increasing the risk that turmoil in the debt market will translate into higher borrowing costs for businesses and consumers.
Tuesday’s modest move of 2.5 basis points in the 10-year yield — to 1.595% — is a reminder that it’s not just bonds of 20 to 40 years that are under pressure, though the most extreme moves have been in these super-long maturities.
An upper house election on Sunday that could see the defeat of the ruling coalition is fueling concerns that government spending could be ramped up, further pressuring yields. Rival political parties have campaigned on populist promises including cash handouts, while opinion polls suggest the ruling bloc led by the Liberal Democratic Party may struggle to win a majority.
“The biggest story in Japan this week must be the spiking yields” that is playing up again, said Amir Anvarzadeh, Japan equity strategist at Asymmetric Advisors Pte. “Bond vigilantes are finally focusing on Japan” where debt to GDP is about 250%, a quarter of the annual budget is set aside for refinancing debt that was issued at lower rates, and politicians are talking about tax cuts to stay in power, he said.
The government is closely monitoring market moves of Japan’s sovereign debt, said Economic Revitalization Minister Ryosei Akazawa, who added that fiscal concerns won’t stop the government from making necessary budget allocations to realize its economic goals. He expects the country’s fiscal health to improve as it switches to a growth-oriented economy.
Japan’s bond selloff hits other markets
The sell-off in Japan’s $7.7 trillion bond market is already spilling over into major debt markets, amplifying ructions driven by fears that governments around the world are spending more than they can afford. Japan’s 20- and 30-year yields both climbed to their highest levels since 1999 on Tuesday, and are now slightly lower.
The 10-year bond yields are particularly closely watched because they are seen as having a direct impact on household and business spending through mortgage rates and other borrowing costs.
Atsushi Takeda, chief economist at Itochu Research Institute, said businesses broadly don’t take on debt in the super-long end, hence the rise in 10-year bond yields is something “we must keep a close eye on.” Even though Sunday’s election result is hard to predict, “opposition parties are calling for a cut in the sales tax so if they win, fiscal anxiety will stay. If Ishiba’s Liberal Democratic Party wins, investors are probably back to buying bonds,” he said.
The yield is being driven by instability in super-long bonds due to demand concerns and declining liquidity, said Takahiro Otsuka, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities Co. “It can’t be said with certainty that the 10-year yield will stop rising at around the 1.6% level.”
Any runaway increase in this yield would be detrimental to Japan’s finances, according to Mizuho Financial Group Inc.’s chief executive officer. If it goes beyond 3% or so, that would hurt the budget, according to Masahiro Kihara, CEO of Japan’s third-biggest bank, who spoke in a Bloomberg Television interview.
What Bloomberg strategists say:
“The common thread between US, European and Japanese long-term debt is that fiscal policy is carrying more weight than monetary policy in terms of setting market yields…This yield genie is out of the bottle and not going back in any time soon.”
— Mark Cranfield, MLIV Strategist. Read more on MLIV.
The move by the Ministry of Finance to cut back on issuance of super-long bonds isn’t stemming the rise in borrowing costs so far. Some major life insurers are also shunning super-long bonds, leaving a gap in demand as the nation’s central bank gradually pares back its debt purchases.
“The environment for selling bonds will continue,” said Tadashi Matsukawa, head of bond investments at PineBridge Investments Japan Co. “Buybacks from the Ministry of Finance could be one of the key measures to stabilize yields.”
Japan’s Finance Minister Katsunobu Kato said on Monday that bond yields are decided by the market, and that he’ll refrain from commenting on specific moves.
Bank of Japan Governor Kazuo Ueda has said the nation’s super-long yields have a limited impact on the real economy compared to shorter-term debt. Yet he has also said they will carefully monitor developments.
“Ueda is currently downplaying the spike in super-long yields, but I’m sure he’s watching the situation closely,” said Yuichi Kodama, economist at Meiji Yasuda Research Institute. “He’s avoiding explicit comments because any statement could be interpreted as signaling market intervention or as a threshold for intervention.”
