(Bloomberg) — Japan’s bond market is facing a potential Liz Truss moment as the risk of a ruling coalition defeat in Sunday’s election fuels concerns over fiscal policy, according to SMBC Nikko Securities Inc.
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Yields on bonds with maturities of 20 years and beyond have risen at least 20 basis points this month, part of a wave of selling in global bond markets as investors increasingly worry about government finances. That has put the spotlight on a weekend election for Japan’s upper house, which local media think may end in disappointment for the ruling Liberal Democratic Party and its coalition partner.
Rival political parties have campaigned on populist promises including cash handouts, consumption tax cuts and more subsidies for education. These pledges raise the risk of heavy selling by so-called bond vigilantes, whose response to the policies of former British Prime Minister Truss around three years ago caused a moment of chaos in the bond market — and sent a warning shot to governments around the world.
“The problem is that we can’t totally rule out a bond vigilante revolt like the Truss shock,” Ataru Okumura, senior interest-rate strategist at SMBC Nikko, wrote in a note on Tuesday. “What’s more, the market can’t fully price in that risk ahead of time.”
Morgan Stanley MUFG Securities Co. expressed a similar view. A coalition defeat may see overseas investors accelerate their selling of super-long bonds on concern that a consumption-tax cut might be more likely, Koichi Sugisaki, macro strategist at Morgan Stanley, wrote in a research note.
The recent election promises have added to broader concerns that Japan may ramp up spending, as it attempts to soften the impact of US tariffs and possibly concede to Washington’s push for higher defense outlays. That may compound the pressure on longer maturity bonds, which are vulnerable to long-run concerns about fiscal health.
Japan’s benchmark 10-year yield hit its highest level since 2008 on Tuesday, while the 20-year and 30-year yields climbed to peaks last seen in 1999.
The fate of Truss, who left office after less than two months in power following a bond market revolt, has become synonymous with the power of bond markets to pile pressure on politicians. The analysts aren’t predicting that Japan’s Prime Minister Shigeru Ishiba will lose his job directly as a result of a selloff in bonds, but instead that more market turmoil may be coming if he suffers an election defeat.
