TOKYO, July 9 : Japan's bond market is signalling diminishing confidence that the central bank can contain inflation while the government's spending ambitions further strain the nation's finances.Yields on 10- and 20-year Japanese government bonds (JGBs) shot to multi-decade highs this week as concerns resurfaced about Prime Minister Sanae Takaichi's commitment to fiscal responsibility and normalisation of monetary policy.The gap between 10-year and 2-year JGB yields widened on Wednesday to 143 basis points (bp), the highest since 2004, and reflecting growing concerns about inflation and price risk on the long end along with shrinking expectations for rate hikes by the Bank of Japan on the short end."The latest steepening of the curve is a warning bell from investors," said Kento Minami, senior economist at Daiwa Securities. "There is a gap between the risk the market weighs and the government's fiscal and monetary policy."
UNFUNDED TAX CUTSThe widening rate gap comes with growing unease that the government's economic blueprint, unveiled last month, could constrain the BOJ's ability to tighten monetary policy. Tokyo is now reportedly considering revising the document's language in a bid to calm the bond selloff.The blueprint reinforced impressions that The Takaichi administration views accommodative monetary policy as a prerequisite for successful public-private growth investment, and would thus be "unlikely to look favourably" upon rationales for rate hikes, Mizuho Securities analysts said in a note.The BOJ raised its short-term policy rate to 1 per cent in mid-June. Swap rates indicate an 87 per cent chance of another 25 bps increase at the bank's policy meeting in December, according to LSEG. The 10-year JGB yield climbed further on Thursday, reaching 2.88 per cent, the highest since September 1996 and marking its ninth straight day of gains, the longest streak in 19 years.The yield's 20.5 bp jump this month compares to just 8.5 bp for the two-year JGB, the one most sensitive to BOJ policy."This is a reflection of market concerns that the BOJ will not be able to raise rates faster," said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management.The latest bout of selling echoes a pattern set in motion since Takaichi took office last year. Her aggressive spending plans sent 30- and 40-year bond yields to successive highs in May, but they subsided after the finance ministry trimmed super-long debt issuance.Those worries have now resurfaced. Japan has disclosed plans to spend more than 370 trillion yen ($2.28 trillion) in combined public and private investment through fiscal 2040, alongside an unresolved debate over cutting the tax on food to 1 per cent without specifying how it would be funded.Yields at multi-decade highs have yet to entice buyers back into the market. A sale of 10-year JGBs last week saw measures of demand fall to the lowest since April."There are multiple reasons that the 10-year bond yields are not going to fall," said Masayuki Koguchi, executive chief fund manager at Mitsubishi UFJ Asset Management."The 10-year bond yield is low relative to the nation's inflation. And as prices are set to rise further, the yield would have to rise."The Takaichi administration has tried to assuage markets with reassurances that new spending will be responsible, paid for by rising tax receipts and government efficiencies rather than new debt issuance. She contends that faster economic growth will bring down Japan's debt-to-GDP ratio, the highest in the developed world at more than 200 per cent."Given that Japan is now experiencing inflation, it is important for Japan to run fiscal and monetary policy that corresponds with the real economy," said Daiwa's Minami. ($1 = 162.3900 yen)
