Japan bond yields rocket on election pledges for tax cuts

TOKYO: Most Japanese government bond (JGB) yield shot to record highs on Monday on concerns that an upcoming election will lead to tax cuts that will further weaken the nation’s finances.

The five-year JGB yield soared to an unprecedented 1.69%. The 20-year yield touched 3.265%, while the 30-year yield surged to 3.61%, both all-time highs.

The benchmark 10-year yield surged to as much as 2.275%, the highest since February 1999. Yields move inversely to bond prices.

Monday marks the start of a pivotal week in Japan, with Prime Minister Sanae Takaichi set to dissolve parliament and call a snap election early next month, while the central bank meets to set policy.

An official from Takaichi’s Liberal Democratic Party said on Sunday that the party is considering a pledge to abolish sales taxes on groceries for two years. Makoto Nishida, an opposition party official, said on Monday that Japan can permanently eliminate its sales tax on food by generating revenue from a newly created sovereign wealth fund.

The reported tax cut plan would “impact government spending, which would affect sentiment for the super-long-dated JGBs,” said Keisuke Tsuruta, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

“Even shorter-dated JGBs will be affected by the news, as concerns about the nation’s worsening fiscal health drive the yen weaker and raise bets for a rate hike by the BOJ.”

The BOJ is widely expected to keep rates unchanged at the close of its meeting on Friday. But some central bank policymakers see scope to raise interest rates sooner than markets expect to contend with the weak yen, sources told Reuters.

The two-year yield, the one most sensitive to BOJ policy rates, increased to 1.215%, the highest in LSEG data going back to 2001.

The yield on the 40-year JGB, Japan’s longest tenor, touched 3.95%, a record high.