Japanese bonds remain vulnerable as unpopular Ishiba holds on

Japan Times

22-07-2025

Japanese government bonds are vulnerable to further selling following a historic election defeat for Prime Minister Shigeru Ishiba, although the immediate reaction Tuesday has been damped by a rally in global debt markets.
Benchmark 10-year bonds fell only slightly as trading resumed in Tokyo, pushing yields up by 1.5 basis points. Stocks opened higher on post-election relief, even as their outlook remains at the mercy of tariffs. The yen dipped and faces downside risks in the coming days and weeks from the prospect of more government spending.
While Ishiba hanging on as leader for now provides a measure of continuity for markets, he will also need to find ways to placate opposition lawmakers seeking tax cuts and households wanting relief from inflation. Any concessions to these pressures can be expected to quickly translate into higher bond yields.
With Japan's markets closed for a national holiday on Monday, investors expressing an initial view on the election did so largely through the yen, which advanced about 1% against the dollar after weakening for most of July. The currency weakened about 0.1% to trade around 147.51 as of Tuesday morning in Tokyo.
"Concerns over fiscal expansion continue to simmer in the market, and in light of the election results, JGBs could come under selling pressure,' said Katsutoshi Inadome, a senior strategist at Sumitomo Mitsui Trust Asset Management. "I anticipate a bearish steepening of the yield curve, driven especially by super-long bonds.'
Benchmark 10-year bond yields rose to 1.535%, while the 5-year bond yields rose a basis point to 1.05%.
Yields on longer-maturity JGBs of 20 to 40 years dipped slightly on Friday but have been in an acute uptrend over recent months. The moves in Japanese yields, which have flowed through into global markets, reflect concerns among investors that the government is spending beyond its means.
"Any sense of calm in JGBs is unlikely to linger. Japan's government will need to get on with expansionary policies to win over support from smaller political parties. Moreover, there is a 40-year auction on Wednesday which is unlikely to be smooth sailing ... Meanwhile, there is a global theme of yield curve steepening which isn't going away,' Bloomberg strategist Mark Cranfield said.
A lack of clarity around fiscal and economic policies is likely to dim the global appeal of Japanese assets, at least in the short term, said Dilin Wu, a research strategist at Pepperstone Group. She added that political uncertainty may complicate Tokyo's trade negotiations with Washington, denting market sentiment.
"A triple dip scenario is still on the table,' according to Wu, referring to the risk of the yen, bonds and stocks all falling. Despite Ishiba's insistence that he'll remain in charge, "investors are likely to question how much political capital he has left,' she said.
Finance Minister Katsunobu Kato said on Tuesday that cutting the consumption tax as proposed by opposition parties would be inappropriate.
While Japan's benchmark Topix stock gauge has bounced back from its sharp decline in the wake of U.S. President Donald Trump's tariffs salvo in April, it remains well off the record high set in mid-last year.
"For Japanese equities, the picture is more complex,' said Hebe Chen, an analyst at Vantage Markets in Sydney. "A weaker yen may offer short-term support to exporters, but the deepening political noise threatens to erode broader investor confidence.'
The yen could also be hit, particularly if long-term government bonds sell off, said Hiroshi Namioka, chief strategist and fund manager at T&D Asset Management. "There's a significant possibility of yen depreciation,' he said. "Although I expect super-long JGB yields to rise, it's for negative reasons. That could prompt yen selloffs.'
Nick Twidale, chief analyst at ATFX Global Markets, said he expects selling in Japanese stocks and an overall weakening in the yen, despite its "initial haven move' higher on Monday.
"There's plenty of volatility to come on both the domestic front and the trade front,' said Twidale. "I don't think policy uncertainty bodes well for Japanese equities, plus we still have the U.S. tariffs hanging over their heads and the new political setup could make things more tricky,' he added.