Japanese Bonds Crater After PM Takaichi Prepares To Issue Much More Debt To Pay For Gasoline Subsidies
While it may seem like every government these days - not just Emerging but certainly all Developing countries too - has become a banana republic in light of the increasingly more idiotic fiscal and monetary policies adopted to kick the can at least until the next election, nobody is quite as cartoonish as Japan, the place where all modern-day central bank experiments started in the late 1980s.
While on one hand the Japanese finance ministry and Bank of Japan have, in recent days and over the years, engaged in aggressive currency day trading, where they try to avoid a collapse in the yen by purchasing the currency in exchange for reserves such as US dollars, on the other hand, the same authorities have been, for the past 3 decades, been engaging in unlimited yen printing through perpetual QE (which despite the country's soaring inflation and collapsing currency, goes on to this day even though Japan's Yield Curve Control is taking a short break). End result: between the selling and buying of yen, the only thing Japanese officials have achieved is becoming the laughing stock of the world. Meanwhile, Japanese bond yields have exploded to multi-decade, if not record highs, as we showed last night.
One reason, besides all the other "usual suspects" such as soaring energy import costs, an grotesque inability to hike rates and contain inflation, not to mention relentless capital flight, is that as Reuters reported overnight, Japan's government is likely to issue even more debt as part of funding for a planned extra budget to cushion the economic blow from the Middle East war.
Of course, any additional debt issuance would further strain Japan's already worsening finances and may accelerate rises in long-term interest rates. Actually, better make that "will" accelerate: the report pushed the yield on the benchmark 10-year Japanese government bond (JGB) to 2.8% on Monday, its highest since October 1996, and the 30-year yield to a record top.
On Monday, Prime Minister Sanae Takaichi said she had told Finance Minister Satsuki Katayama last week to start work on compiling a supplementary budget, a rather dramatic shift from previous remarks ruling out the chance of an extra budget.
The extra budget will focus on funding government subsidies to curb gasoline and utility bills, as surging oil prices caused by the Middle East conflict cloud the outlook for an economy heavily reliant on fuel imports from the region.
While the size of spending has yet to be worked out, the decision could cast doubt on the administration's laughable pledge to pursue a "responsible, proactive" fiscal policy. Spoiler alert: there is no "responsible" fiscal policy when your debt/GDP is over 200%. You can only hope for a peaceful death.
And the market was quick to react.
"The about-face by Takaichi, who had been ruling out an extra budget all along, is making markets jittery and triggering a JGB selloff across the curve," said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management.
In a proposal to the finance ministry, opposition party leader Yuichiro Tamaki called on Friday for an extra budget of about 3 trillion yen ($18.9 billion), which may serve as a benchmark for future debates on the size of spending.
"There's a host of reason to sell JGBs but very few to buy," Inadome said, adding that markets are starting to price in the chance of an extra budget to the scale of 5 trillion-to-10 trillion yen.
Finance minister Katayama, who is in Paris to attend the Group of Seven finance leaders' gathering, said on Monday she was instructed by the prime minister to "minimise various risks," when asked about the rise in long-term interest rates.
"That's something I'm contemplating," Katayama said when asked how the government would fund the extra budget. She did not elaborate.
Japan already curbs gasoline prices with subsidies and eyes tapping existing funds to revive subsidies for utility bills (which of course means no demand destruction due to artificially low prices, but instead the massive new debt needed to subsidize said spending, will instead translate into state and sovereign destruction). An extra budget would come on top of a record 122-trillion-yen budget for the fiscal year that began in April, which makes up the core of the dovish premier's expansionary fiscal policy.
Critics warn that more spending plans, coupled with slow interest rate hikes by the Bank of Japan, could fan inflationary pressure in an economy already seeing rising energy costs from the Middle East war and higher import prices from a weak yen.
Japan's Nikkei stock average fell on Monday and the yen hit 158.97 per dollar, the weakest level since April 29, and it's about to explode even higher once the marker realizes the sheer idiocy of selling dollars to buy yen on one hand, and then turning around and doing QE - i.e., printing yen - to absorb all the new massive debt issuance about to hit a bond market where the BOJ has long since become a 50% holder of all JGBs and the marginal price setter.
"When countries like Japan and Britain contemplate fiscal stimulus, there's a tendency for that to trigger a triple selling of shares, currencies, and bonds because their economic growth is weak and inflationary risks are high," said Daisuke Uno, chief strategist at Sumitomo Mitsui Banking.
The extra budget will be compiled around June or July, when the administration will lay out plans to boost investment and details for a two-year freeze on an 8% levy on food.
Reuters tongue-in-cheekly adds that "the bond selloff would also complicate the BOJ's decision on whether to raise its short-term policy rate to 1% from 0.75% at its next meeting in June." Uhm, no, it wouldn't complicate it - it would make it an absolute farce as the last thing Japan needs if it is to sell even more debt, is higher rates. But then Tokyo better brace for a yen at 200 vs the dollar, unless the MOF is prepared to liquidate all of its USD-denominated reserves in an absolutely idiotic attempt to keep the yen from collapsing.
At the June meeting, the BOJ will also review its existing bond tapering programme and unveil a new plan for fiscal 2027 onward.
The war-induced spike in energy prices, coupled with rising import costs from the collapsing yen, pushed Japan's wholesale inflation to a three-year high of 4.9% in April, bolstering the case for the central bank to raise rates as soon as next month.
While the BOJ tends to avoid shifting policy when markets are volatile, delaying rate hikes further could stoke already mounting fears it is behind the curve in addressing the risk of too-high inflation, analysts say. On the other hand, raising rates could spark an even more aggressive selloff across the curve, resulting in both a bond and FX market failure. Oops.
Markets have priced in roughly a 70% chance of a June rate hike after a slew of recent hawkish signals from the BOJ and a split vote to the BOJ's decision to keep rates steady in April. Nearly two-thirds of economists polled by Reuters expect the BOJ to raise rates in June.
"If inflationary risks heighten, there's a chance the BOJ could raise short-term rates to 1.5% by the March end of the current fiscal year," said Mari Iwashita, executive rates strategist at Nomura Securities. The 10-year yield could head towards 3%, she added.