Japan’s government bond market, long shielded by the Bank of Japan’s yield curve control and decades of deflation, faces a test of faith under Sanae Takaichi, who is set to be the country’s first female prime minister.
Markets are betting that Takaichi, who won the race to lead Japan’s ruling Liberal Democratic Party on Saturday, will blend a pro-growth, fiscally active agenda with a still-dovish central bank: a mix that threatens to push long-term yields higher and steepen the Japanese government bond curve.
The parliament is expected to confirm the hardline conservative as prime minister on Oct. 15. Takaichi is seen as a proponent of “Abenomics,” the economic strategy of the late Prime Minister Shinzo Abe, which touted fiscal spending, loose monetary policy and structural reforms.
Goldman Sachs said that Takaichi’s win presents “upside risks to long-end JGB yields”, calling a 10- to 15-basis-point pop in 30-year yields a plausible first step.
The bank’s analysts added that long-term Japanese government bonds have been “decoupled from cyclical anchors” such as inflation or economic growth this year and could remain elevated as investors price the risk of looser fiscal policy and a slower BOJ hiking cycle.