The Japanese Bond Market Will Face Pressure from the Lower House Election

In recent weeks, the Japanese financial market has shown clear warning signs. Investors are becoming more cautious than ever as upcoming political decisions are set to reshape the country’s economic landscape.

Declining Demand at Government Bond Auctions

According to data from Jin10, the recent 10-year government bond auction recorded a bid-to-cover ratio of 3.02, lower than the previous auction’s 3.30 and below the 12-month average of 3.24. The tail spread remains stable at 0.05, indicating market caution.

This decline in demand reflects investors’ apprehension amid the uncertain atmosphere surrounding the election. As markets await election results, a decrease in demand in the debt market is understandable.

New Fiscal Policies Will Impact the Market

Recent surveys suggest that Japan’s ruling coalition is expected to win about 300 of the 465 Lower House seats. The Liberal Democratic Party is projected to maintain power with a single-party majority, allowing Prime Minister Sanae Takaichi to continue pushing forward her economic stimulus programs.

These plans will add further pressure to Japan’s public debt, which has already been under market stress. Takaichi’s proposed consumption tax cuts previously shocked the market, causing yields to spike to multi-year highs.

Interest Rate Outlook and Investor Expectations

Although yields have eased since then, the benchmark 10-year bond yield remains near 2.25%, the highest since 1999. This high level reflects concerns over future government spending.

Overnight index swap contracts are currently pricing in a 76% probability of interest rate hikes in April. The market has fully priced in a 25 basis point increase in June. These expectations will continue to shape Japanese investors’ strategies in the coming months.

With these factors combined, the Japanese bond market faces significant challenges ahead.