Alarmist reporting around Japanese Prime Minister Sanae Takaichi, comparing her to Liz Truss, the shortest serving UK premier, now looks highly overblown. Takaichi’s Liberal Democratic Party (LDP) won a resounding supermajority at elections over the weekend, and the Nikkei 225 stock average responded by breaching the 57,000 point mark for the first time ever.
The sharp selloff in Japan government bonds (JGBs) last month that saw 30-year yields peaking at just over 3.87% on January 20 before easing to 3.568% on February 5 was the response of local and global investors to Takaichi’s campaign promises. Specifically, these were to suspend the 8% food tax for two years and other fiscal giveaways.
Some news reports said the bond selloff posed a US$7 trillion risk for global markets. This may probably be an overreaction to shifts in a market that’s been relatively stable for decades. Significantly, Takaichi made few comments about tax breaks during her campaign.
To be sure, Japan has longer-term issues. The share of government borrowing to gross domestic product is about 230%, the highest among advanced economies. Debt servicing could hit 35%-40% of total expenditure over the next decade. Interest rates, however, look on track to hit current targets of 2%.
In one other possible indicator, Mitsubishi UFJ Financial Group (MUFG), one of Japan’s leading JGB holders, saw its stock rise 2.5% to a season high as trading closed on the Friday before the election. MUFG is expected to boost its JGB holdings.
The LDP’s solid win should ensure policy continuity for years, a valuable commodity in today’s volatile environment. Opposition parties were calling for deeper tax cuts, risking worse fiscal consequences. With a supermajority, the LDP no longer needs a coalition partner to pass laws.
Wage increases, meanwhile, may be more effective in addressing living costs and boosting consumption. Given Japan’s tradition of consensus policymaking within the so-called “Iron Triangle” of bureaucrats, major corporations and the LDP, these may now be deliverable.
Japan’s role in the recent past as ballast for the global rates complex may be diminishing. But with other trends at work, such as the rotation out of US assets, this may have less influence than it might have had before the upsets in US policy.
As for the Trump administration’s endorsement of Takaichi, it may only be temporary, given how unpredictable policy has been. But it will probably give investors some comfort around tariff levels.
In May last year, Katsunobu Kato, the then finance minister, said that Japan could use its $1.125 trillion of US Treasury holdings – the single largest sum held by a foreign investor – as a lever in negotiations with the US. Kato has since left office, but the option he floated remains open.
