Japan’s bond market is bracing for one of its most volatile weeks this year as a mix of political trouble, central bank signals, and U.S. drama come crashing in at the same time.
According to Reuters, long-term yields on Japanese government bonds (JGBs) are hovering just below record highs after Prime Minister Shigeru Ishiba’s coalition lost its grip on the upper house.
That loss gave a lift to opposition lawmakers who support more borrowing to fund tax cuts, exactly the kind of talk that’s making bond investors nervous.
At the same time, short-term bond yields are moving up after Japan signed a trade agreement with the United States, clearing the way for the Bank of Japan (BOJ) to resume hiking rates.
That puts both ends of the yield curve under pressure, with traders trying to make sense of what could come out of Tokyo and Washington by the end of the week.
Shigeru Ishiba faces internal revolt ahead of key parliamentary session
Ishiba’s job is hanging by a thread. He says he won’t step down, but everyone in his party knows the writing’s on the wall. Friday’s emergency session in parliament could be the moment things start to unravel.
Some lawmakers think Ishiba will hold on until the August 15 memorial marking 80 years since the end of World War II, while others believe he’s buying time until the Liberal Democratic Party (LDP) finishes its post-election report in August.
If Ishiba quits, Sanae Takaichi, who narrowly lost to him last time, could make a comeback. She’s known for pushing reflation policies, and that’s not what bondholders want to hear right now. The market doesn’t trust that kind of change.
There’s talk that the government might need to expand its coalition or work more closely with opposition lawmakers to get anything done, which could open the door to more debt-driven spending.
Long-dated JGBs are stuck at high yields because no one wants to be caught off guard by sudden political changes or policy changes.
Bank of Japan decision looms as traders watch Fed and U.S. politics
The BOJ meets on Thursday, and while no immediate rate hike is expected, the U.S. trade deal has given the central bank more confidence in Japan’s growth outlook. That’s why traders are now betting on a hike before the year ends, possibly in October.
Everyone will be watching Governor Kazuo Ueda’s press conference after the meeting. People want to know if the BOJ is finally ready to start backing away from its ultra-loose policies. If they do, that means less bond buying from the central bank. And that puts the pressure on the Finance Ministry to keep things stable.
Finance Minister Katsunobu Kato made it clear on Monday that the market needs new buyers to replace the BOJ. “We are aware of the vacuum that would follow,” Kato said, adding that in May, the ministry changed more of its issuance toward short-term bonds to calm things down. That worked for a bit, but with the recent spike in selling ahead of the elections, it’s obvious those problems are still there.
While Japan tries to figure things out at home, the United States is adding more risk. On Wednesday, the Federal Reserve will announce its rate decision. Most expect it to hold steady, but there’s tension building inside the Board of Governors.
Christopher Waller, whose name is now being floated as a possible replacement for Fed Chair Jerome Powell, is expected to side with Governor Michelle Bowman in voting for a cut, breaking from the majority.
Last week, Trump showed up for a rare meeting at the central bank’s headquarters and later told reporters there was “no need” to replace Powell “for now.” But with Trump, nothing sticks.
And if people start doubting the dollar’s role as a global reserve currency or believe massive spending is on the way, long-term U.S. Treasury yields might spike. That would spill over into Japan’s bond market, dragging yields even higher and making life even harder for Japanese officials already juggling too much.
