On Monday, heightened volatility is expected in the Japanese government bond market and a sharp rise in stocks following the resignation of Prime Minister Shigeru Ishiba, considered a financial “hawk.”
Yields on Japan’s ultra-long government bonds (JGBs) are already hovering near record highs due to global concerns about the budget deficit and domestic political pressure on Ishiba. The Japanese stock index Nikkei recently fell from last month’s record high.
Attention is now focused on potential successors to Ishiba and a possible return to the “Abenomics” policies of the late Shinzo Abe, who implemented large-scale fiscal stimulus and unprecedented central bank monetary easing.
“The reflexive market reaction would be a bearish rise in Japanese government bonds, a weaker yen, and modest gains in equities, as investors see higher risks from policies similar to Abenomics,” said Naka Matsuzawa, chief macro strategist at Nomura Securities in Tokyo.
Ishiba’s relatively conservative fiscal stance was considered positive for the bond market, where yields remain relatively low, but concerns about Japan’s massive debt and rising budget deficit persist.
The country’s outstanding debt stands at nearly 250% of GDP, the highest among developed nations. The Ministry of Finance reported last week that Japan’s budget requests for the next fiscal year set a record for the third consecutive year.
“Ultra-long bond yields are likely to rise after Ishiba’s resignation,” said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management. “There is upward pressure on ultra-long bond yields due to uncertainty over fiscal conditions, and this pressure will grow.”
Yields on 30-year bonds jumped to 3.285% last week, and 20-year bonds to 2.69%, the highest levels since 1999. A sharp rise in yields means higher borrowing costs for the government, corporations, and households.
The JGB market was hit in mid-July when Ishiba’s coalition suffered defeat in the upper house elections. Outsiders advocating tax cuts and increased spending won seats, and for weeks there has been speculation about pressure within Ishiba’s Liberal Democratic Party demanding his resignation.