Japan bond market rattled as Takaichi tax lower pledge assessments fiscal belief

Japan’s bond market is testing the credibility of fiscal policy as election-driven tax promises collide with rising yields. Reuters have a good piece up I’ve summarised here.

In brief:

• Takaichi’s food tax pledge has shaken Japan’s bond market

• Investors fear erosion of long-standing fiscal discipline

• JGB yields surged to multi-decade highs

• Debt servicing and ageing costs amplify risks

• Policy tools offer limited, short-term relief

Japan’s bond market turmoil sparked by Prime Minister Sanae Takaichi’s pledge to suspend the consumption tax on food may prove difficult to contain, as investors question whether the government is undermining long-standing fiscal discipline at a sensitive moment for the market.

Takaichi’s promise to halt the 8% food levy for two years, a policy once considered politically untouchable, has revived concerns about Japan’s ability to manage the world’s heaviest public debt burden. Even her mentor, former prime minister Shinzo Abe, avoided cutting the consumption tax during the height of “Abenomics,” ultimately opting instead to push through a politically costly tax increase in 2019.

Market anxiety has surfaced quickly. The yield on the 10-year Japanese government bond surged nearly 20 basis points over two sessions earlier this week to a 27-year high, while super-long maturities recorded record sell-offs reminiscent of the UK’s 2022 “Truss shock,” when unfunded tax cuts triggered a collapse in confidence. Although Japan’s situation differs structurally, with limited pension leverage and a more cautious central bank, investors are increasingly uneasy about fiscal slippage at a time when the Bank of Japan is stepping back from years of aggressive bond buying.

Japan’s vulnerabilities are acute. Roughly a quarter of the national budget is already devoted to debt servicing, while ageing demographics are driving relentless growth in social welfare spending. Consumption tax receipts account for more than one-fifth of total revenue, making the proposed suspension — estimated to cost around ¥5 trillion annually — particularly destabilising. Critics argue that once lowered, consumption taxes are politically difficult to restore.

While the government retains technical options to slow the sell-off, including bond buybacks, trimming issuance, or BOJ emergency purchases, analysts warn these tools offer only temporary relief. With elections looming and political parties competing over tax cuts and spending promises, markets fear that fiscal prudence is being sacrificed for electoral gain.

Unless the government outlines a credible funding framework after the election, investors warn bond market volatility may persist, raising the risk that Japan’s fiscal credibility faces a more lasting test.