Latest news with #fiscal deficit
Zawya
2 days ago
- Business
- Zawya
Growth and foreign fervour for yield give Japan fiscal wiggle room
SINGAPORE - A weekend election in Japan has made real the prospect of bigger government spending and deficits in the world's most indebted developed nation, although for now foreign investors and a growing economy could keep its bond yields from spiking sharply. Japan's upper house election on Sunday dealt a big blow to the ruling coalition and Prime Minister Shigeru Ishiba ahead of a looming tariff deadline with the United States. Investors are bracing for scenarios ranging from Ishiba continuing to run a minority government, a deal with a smaller opposition party or even his ouster, but one thing they are certain of is that Japan is heading for tax cuts and a wider fiscal deficit. Under normal circumstances, that should lead to a selloff in bonds and higher yields as investors demand to be compensated for risk to lend to a country with debt exceeding $8 trillion, or nearly 2-1/2 times the size of its economy. But while Japanese long-term bond yields have been rising, they are nowhere near levels reflecting such government profligacy. Thirty-year bonds fetch just 3%. A weak yen and a legacy of low interest rates, Japan's return to inflation, huge domestic savings and the Bank of Japan's policies have worked to anchor Japanese government bond (JGB) yields. Analysts expect some of that support for bonds will continue. "With some of the proposals at the margin, with the changed political dynamics, potentially you could see more clamour for fiscal support including consumption taxes," said Michael Wan, a senior currency analyst at MUFG. But Wan and other analysts point to Japan's economic growth and emergence from deflation in the past three years as reasons the debt burden is manageable and likely to decline in the coming years. Japan's fiscal situation isn't as dire as many think," Marcel Thieliant, Capital Economics' head of Asia Pacific, said in a note. While Japan's gross debt to GDP is the highest of any major economy, net debt is much lower, he said. "Relative to other countries, Japan is a net creditor. So you do have, in theory, a lot of funds on the sidelines, from domestic institutions who have invested abroad, which could cap any sharp and dislocation in yield spikes over the medium term," MUFG's Wan said. FOREIGN BID Its role as one of the world's biggest creditors sets Japan apart from other G7 nations with debt and rising bond yields, such as Britain and the United States. Together with pension giant GPIF and life insurance firms, the country has about $3.6 trillion dollars invested overseas, of which half is in U.S. assets. While Japan can tap into its huge pool of domestic savings if needed, for now its low yields and weakening currency are luring foreign investors, who can switch dollars or euros for yen and earn a spread on the currency swap. Swapping dollars to yen to invest in one-year JGBs, for instance, yields about 30 basis points more than the 3.9% yield on one-year U.S. Treasuries. "Global managers or index guys actually look at the developed market as a relative value play, like whichever bounces up the most," said Rong Ren Goh, a portfolio manager in the fixed income team at Eastspring Investments. "Of course it makes more sense for me to rotate out and do my asset swapping to get the best swap-adjusted return." The steepness of the Japanese government curve has helped entice bond investors. Foreigners have poured more than 15 trillion yen ($101.17 billion) into Japanese bonds so far this year. Thirty-year yields are up 80 basis points (bps) at all-time highs this year and the yield curve is at its steepest in years, with the spread between 10-year and 30-year bonds above 150 bps. Thieliant still expects the 10-year JGB yield will rise to 2% by the end of 2026 from current levels around 1.5%, but that he said is based on a hawkish monetary policy view. ($1 = 148.2600 yen) (Reporting by Rae Wee and Vidya Ranganathan Editing by Shri Navaratnam)
Reuters
2 days ago
- Business
- Reuters
Growth and foreign fervour for yield give Japan fiscal wiggle room
SINGAPORE, July 21 (Reuters) - A weekend election in Japan has made real the prospect of bigger government spending and deficits in the world's most indebted developed nation, although for now foreign investors and a growing economy could keep its bond yields from spiking sharply. Japan's upper house election on Sunday dealt a big blow to the ruling coalition and Prime Minister Shigeru Ishiba ahead of a looming tariff deadline with the United States. Investors are bracing for scenarios ranging from Ishiba continuing to run a minority government, a deal with a smaller opposition party or even his ouster, but one thing they are certain of is that Japan is heading for tax cuts and a wider fiscal deficit. Under normal circumstances, that should lead to a selloff in bonds and higher yields as investors demand to be compensated for risk to lend to a country with debt exceeding $8 trillion, or nearly 2-1/2 times the size of its economy. But while Japanese long-term bond yields have been rising, they are nowhere near levels reflecting such government profligacy. Thirty-year bonds fetch just 3%. A weak yen and a legacy of low interest rates, Japan's return to inflation, huge domestic savings and the Bank of Japan's policies have worked to anchor Japanese government bond (JGB) yields. Analysts expect some of that support for bonds will continue. "With some of the proposals at the margin, with the changed political dynamics, potentially you could see more clamour for fiscal support including consumption taxes," said Michael Wan, a senior currency analyst at MUFG. But Wan and other analysts point to Japan's economic growth and emergence from deflation in the past three years as reasons the debt burden is manageable and likely to decline in the coming years. Japan's fiscal situation isn't as dire as many think," Marcel Thieliant, Capital Economics' head of Asia Pacific, said in a note. While Japan's gross debt to GDP is the highest of any major economy, net debt is much lower, he said. "Relative to other countries, Japan is a net creditor. So you do have, in theory, a lot of funds on the sidelines, from domestic institutions who have invested abroad, which could cap any sharp and dislocation in yield spikes over the medium term," MUFG's Wan said. Its role as one of the world's biggest creditors sets Japan apart from other G7 nations with debt and rising bond yields, such as Britain and the United States. Together with pension giant GPIF and life insurance firms, the country has about $3.6 trillion dollars invested overseas, of which half is in U.S. assets. While Japan can tap into its huge pool of domestic savings if needed, for now its low yields and weakening currency are luring foreign investors, who can switch dollars or euros for yen and earn a spread on the currency swap. Swapping dollars to yen to invest in one-year JGBs, for instance, yields about 30 basis points more than the 3.9% yield on one-year U.S. Treasuries. "Global managers or index guys actually look at the developed market as a relative value play, like whichever bounces up the most," said Rong Ren Goh, a portfolio manager in the fixed income team at Eastspring Investments. "Of course it makes more sense for me to rotate out and do my asset swapping to get the best swap-adjusted return." The steepness of the Japanese government curve has helped entice bond investors. Foreigners have poured more than 15 trillion yen ($101.17 billion) into Japanese bonds so far this year. Thirty-year yields are up 80 basis points (bps) at all-time highs this year and the yield curve is at its steepest in years, with the spread between 10-year and 30-year bonds above 150 bps. Thieliant still expects the 10-year JGB yield will rise to 2% by the end of 2026 from current levels around 1.5%, but that he said is based on a hawkish monetary policy view. ($1 = 148.2600 yen)
Yahoo
3 days ago
- Business
- Yahoo
Japan ruling party's election loss is in the price, investors say
By Vidya Ranganathan SINGAPORE (Reuters) -Japan's upper house election on Sunday dealt a big blow to the ruling coalition and sets markets up for possible policy paralysis and a bigger fiscal deficit, much of which is already priced in, analysts said. Exit polls after Sunday's election showed the ruling coalition led by Prime Minister Shigeru Ishiba is likely to lose control of the upper house, thus making it a minority in both chambers of the government. Japanese markets are closed on Monday for a holiday, so the yen may be where investors get their first inkling of any disruption from the election outcome. The Japanese currency has already weakened considerably this year on expectations of changes to taxes and a bigger fiscal deficit. The election result, while not entirely a shock to markets, also comes at a tricky time for a country trying to get a tariff deal with U.S. President Donald Trump before an Aug. 1 deadline. Japanese government bonds (JGBs) plunged last week, sending yields on 30-year debt to an all-time high, while the yen slid to multi-month lows against the U.S. dollar and the euro. "I will not chase the coalition loss trades, and I suspect participants will spend some time analyzing the implications of the loss, which could take time to materialize, and also refocus attention to the trade negotiations which is another major macro risk for Japan," said Rong Ren Goh, a portfolio manager in the fixed income team at Eastspring Investments. Investors expect it will be a while before it becomes clear whether the ruling coalition intends to continue as a minority government, or draw in a new partner. Among the most likely candidates is the Democratic Party for the People (DPP), which has urged the Bank of Japan to reverse course and again loosen monetary policy. Investors are bracing for the LDP to compromise heavily to accommodate opposition parties' desire for tax cuts. Ishiba's fate also remains an unknown, although he said on Sunday he intends to stay in his position. Within the LDP, a leading candidate to replace Ishiba, should he step down, is Abenomics proponent Sanae Takaichi, who has advocated for a resumption of monetary easing by the BOJ. All three leading opposition parties back some form of consumption tax cuts, with the populist, right-wing Sanseito proposing a phase-out of VAT altogether. Those cuts would have to be paid for with increased Japanese government bond issuance. With debt about 2-1/2 times GDP, Japan is already the world's most indebted major country. "Preliminary tallies indicate that the Liberal Democratic Party–Komeito coalition will retain office only as a minority government," Shoki Omori, chief desk strategist at Mizuho Securities in Japan, said in a note. Omori also does not expect the LDP to force a leadership change, particularly while trade talks with the U.S. government are ongoing. "Against that political backdrop, prospects for an aggressive fiscal stimulus are limited....A meaningful supplementary budget, if one emerges, would not be debated until the autumn Diet session at the earliest," he wrote. If Ishiba resigns, the political uncertainty could be a trigger for foreign investors to sell Japanese shares and the yen, analysts said. Barclays analysts estimate a five percentage point cut to Japan's sales tax, currently at 10%, would lead to a 15-20 basis point increase in the 30-year yield. Japanese government 30-year yields are up 80 basis points (bps) this year and the yield curve is at its steepest in years, with the spread between 10-year and 30-year bonds above 150 bps. The yen has had a volatile first half of 2025 in a range of 140-160 per dollar. It rallied hard after the Bank of Japan's rate rise in January stoked expectations for a faster pace of monetary tightening, but has dithered since late April on political uncertainty, fractious tariff negotiations with the Donald Trump administration and the BOJ's dovishness. Long speculative positions in the yen are however still very large, making it likely that the currency will fall rapidly if Japan calls for a snap election or fiscal policy is loosened. The Nikkei 225 benchmark, by contrast, is up more than 11% since April 2, when Trump unveiled his global tariffs. (Additional reporting by Kevin Buckland in Tokyo; Editing by Chizu Nomiyama) Sign in to access your portfolio
Reuters
3 days ago
- Business
- Reuters
Japan ruling party's election loss is in the price, investors say
SINGAPORE, July 21 (Reuters) - Japan's upper house election on Sunday dealt a big blow to the ruling coalition and sets markets up for possible policy paralysis and a bigger fiscal deficit, much of which is already priced in, analysts said. Exit polls after Sunday's election showed the ruling coalition led by Prime Minister Shigeru Ishiba is likely to lose control of the upper house, thus making it a minority in both chambers of the government. Japanese markets are closed on Monday for a holiday, so the yen may be where investors get their first inkling of any disruption from the election outcome. The Japanese currency has already weakened considerably this year on expectations of changes to taxes and a bigger fiscal deficit. The election result, while not entirely a shock to markets, also comes at a tricky time for a country trying to get a tariff deal with U.S. President Donald Trump before an Aug. 1 deadline. Japanese government bonds (JGBs) plunged last week, sending yields on 30-year debt to an all-time high, while the yen slid to multi-month lows against the U.S. dollar and the euro. "I will not chase the coalition loss trades, and I suspect participants will spend some time analyzing the implications of the loss, which could take time to materialize, and also refocus attention to the trade negotiations which is another major macro risk for Japan," said Rong Ren Goh, a portfolio manager in the fixed income team at Eastspring Investments. Investors expect it will be a while before it becomes clear whether the ruling coalition intends to continue as a minority government, or draw in a new partner. Among the most likely candidates is the Democratic Party for the People (DPP), which has urged the Bank of Japan to reverse course and again loosen monetary policy. Investors are bracing for the LDP to compromise heavily to accommodate opposition parties' desire for tax cuts. Ishiba's fate also remains an unknown, although he said on Sunday he intends to stay in his position. Within the LDP, a leading candidate to replace Ishiba, should he step down, is Abenomics proponent Sanae Takaichi, who has advocated for a resumption of monetary easing by the BOJ. All three leading opposition parties back some form of consumption tax cuts, with the populist, right-wing Sanseito proposing a phase-out of VAT altogether. Those cuts would have to be paid for with increased Japanese government bond issuance. With debt about 2-1/2 times GDP, Japan is already the world's most indebted major country. "Preliminary tallies indicate that the Liberal Democratic Party–Komeito coalition will retain office only as a minority government," Shoki Omori, chief desk strategist at Mizuho Securities in Japan, said in a note. Omori also does not expect the LDP to force a leadership change, particularly while trade talks with the U.S. government are ongoing. "Against that political backdrop, prospects for an aggressive fiscal stimulus are limited....A meaningful supplementary budget, if one emerges, would not be debated until the autumn Diet session at the earliest," he wrote. If Ishiba resigns, the political uncertainty could be a trigger for foreign investors to sell Japanese shares and the yen, analysts said. Barclays analysts estimate a five percentage point cut to Japan's sales tax, currently at 10%, would lead to a 15-20 basis point increase in the 30-year yield. Japanese government 30-year yields are up 80 basis points (bps) this year and the yield curve is at its steepest in years, with the spread between 10-year and 30-year bonds above 150 bps. The yen has had a volatile first half of 2025 in a range of 140-160 per dollar. It rallied hard after the Bank of Japan's rate rise in January stoked expectations for a faster pace of monetary tightening, but has dithered since late April on political uncertainty, fractious tariff negotiations with the Donald Trump administration and the BOJ's dovishness. Long speculative positions in the yen are however still very large, making it likely that the currency will fall rapidly if Japan calls for a snap election or fiscal policy is loosened. The Nikkei 225 benchmark (.N225), opens new tab, by contrast, is up more than 11% since April 2, when Trump unveiled his global tariffs.
Yahoo
3 days ago
- Business
- Yahoo
Japan ruling party's election loss is in the price, investors say
By Vidya Ranganathan SINGAPORE (Reuters) -Japan's upper house election on Sunday dealt a big blow to the ruling coalition and sets markets up for possible policy paralysis and a bigger fiscal deficit, much of which is already priced in, analysts said. Exit polls after Sunday's election showed the ruling coalition led by Prime Minister Shigeru Ishiba is likely to lose control of the upper house, thus making it a minority in both chambers of the government. Japanese markets are closed on Monday for a holiday, so the yen may be where investors get their first inkling of any disruption from the election outcome. The Japanese currency has already weakened considerably this year on expectations of changes to taxes and a bigger fiscal deficit. The election result, while not entirely a shock to markets, also comes at a tricky time for a country trying to get a tariff deal with U.S. President Donald Trump before an Aug. 1 deadline. Japanese government bonds (JGBs) plunged last week, sending yields on 30-year debt to an all-time high, while the yen slid to multi-month lows against the U.S. dollar and the euro. "I will not chase the coalition loss trades, and I suspect participants will spend some time analyzing the implications of the loss, which could take time to materialize, and also refocus attention to the trade negotiations which is another major macro risk for Japan," said Rong Ren Goh, a portfolio manager in the fixed income team at Eastspring Investments. Investors expect it will be a while before it becomes clear whether the ruling coalition intends to continue as a minority government, or draw in a new partner. Among the most likely candidates is the Democratic Party for the People (DPP), which has urged the Bank of Japan to reverse course and again loosen monetary policy. Investors are bracing for the LDP to compromise heavily to accommodate opposition parties' desire for tax cuts. Ishiba's fate also remains an unknown, although he said on Sunday he intends to stay in his position. Within the LDP, a leading candidate to replace Ishiba, should he step down, is Abenomics proponent Sanae Takaichi, who has advocated for a resumption of monetary easing by the BOJ. All three leading opposition parties back some form of consumption tax cuts, with the populist, right-wing Sanseito proposing a phase-out of VAT altogether. Those cuts would have to be paid for with increased Japanese government bond issuance. With debt about 2-1/2 times GDP, Japan is already the world's most indebted major country. "Preliminary tallies indicate that the Liberal Democratic Party–Komeito coalition will retain office only as a minority government," Shoki Omori, chief desk strategist at Mizuho Securities in Japan, said in a note. Omori also does not expect the LDP to force a leadership change, particularly while trade talks with the U.S. government are ongoing. "Against that political backdrop, prospects for an aggressive fiscal stimulus are limited....A meaningful supplementary budget, if one emerges, would not be debated until the autumn Diet session at the earliest," he wrote. If Ishiba resigns, the political uncertainty could be a trigger for foreign investors to sell Japanese shares and the yen, analysts said. Barclays analysts estimate a five percentage point cut to Japan's sales tax, currently at 10%, would lead to a 15-20 basis point increase in the 30-year yield. Japanese government 30-year yields are up 80 basis points (bps) this year and the yield curve is at its steepest in years, with the spread between 10-year and 30-year bonds above 150 bps. The yen has had a volatile first half of 2025 in a range of 140-160 per dollar. It rallied hard after the Bank of Japan's rate rise in January stoked expectations for a faster pace of monetary tightening, but has dithered since late April on political uncertainty, fractious tariff negotiations with the Donald Trump administration and the BOJ's dovishness. Long speculative positions in the yen are however still very large, making it likely that the currency will fall rapidly if Japan calls for a snap election or fiscal policy is loosened. The Nikkei 225 benchmark, by contrast, is up more than 11% since April 2, when Trump unveiled his global tariffs. (Additional reporting by Kevin Buckland in Tokyo; Editing by Chizu Nomiyama) Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
