BOJ Won’t Step in Amid Takaichi-led Bold Sell Off
Synopsis
Japan’s central bank has delivered a clear message to the government: don’t count on a bailout for the bond market. After Prime Minister Sanae Takaichi’s aggressive support for huge tax reductions and new spending, nothing remains of Japanese bonds as investors have deserted them, raising interest rates to 30-year highs. The Bank of Japan finds itself in a bind as it must raise rates to save the falling yen, while also facing pressure to lower them to stem government debt. This standoff is a historic turn in Japan’s economic war.
TOKYO – The Bank of Japan (BOJ) has allegedly informed Prime Minister Sanae Takaichi that it will not intervene, as the BOJ bond market is left gripping its heels amid a free fall. The stand-off is rare at a time when the Prime Minister is gearing up for a snap election on Sunday, promising costly tax cuts that have spooked investors and driven the cost of government borrowing to levels not seen in decades.
The Japanese bond market collapsed last month after Takaichi promised to halt food taxes for 2 years. Investors are worried this will compound what’s already the world’s biggest debt mountain among developed economies in Japan. It’s another “Truss shock,” a reference to the “no warning unplanned, unfunded and far from compensated for in growth or cuts public VOA plan” that triggered full blown market meltdown in 2022. Is the Bank of Japan finally exercising its veto against government spending?
The BOJ in a Tight Spot
The central bank is at the moment caught in a challenging “juggling act.” On the one hand, it wants to keep interest rates low so that the economy can grow. On the other hand, the yen has been losing value, raising prices for imports like food and fuel that people use every day.
In order to save the yen, the BOJ has been attempting to lift rates, it recently took them up to 0.75% (a thirty-year high). To start buying bonds to bring down interest rates now would send the wrong signal to world markets, at home and abroad. That is likely to make the yen crash even more, and Japanese households’ lives even harder, experts say.
A High Bar for Stepping In
While the BOJ has levers it can pull to assist the market, such as buying emergency bonds, it thinks that the chaos engulfing markets now is still not particularly severe, a source said. They view the higher yields as a sign of what amounts to a normal market reaction to the government’s plans, not evidence that speculators are in a “panic.”
Bank veterans have also warned that it is not the central bank’s job to deal with the fallout when markets lose their trust in a country’s finances, it is the government’s role. By standing by, the BOJ is really saying to Takaichi that if she wants more spending, she has to accommodate any additional cost of interest.
The Calm Before the Election’s Swirl of Information
Sunday’s election will be a historic turning point. Should Takaichi’s party score a sweeping victory, it would provide her with a “green light” to pursue her spending plans. This could prompt still more selling in the bond market as investors fret about Japan’s ability over the long term to repay its loans.
For the moment, many of the largest Japanese investors, such as life insurance companies, are sitting on the sidelines. They are waiting to see who wins and what the ultimate budget will actually be before they start buying bonds again. This absence of buyers only serves to render the market more brittle and open to drastic plunges in price.
Key Highlights
- The Bank of Japan won’t intervene in the BOJ bond market to specifically lower government debt costs.
- PM Takaichi’s spending plans have sent Japan's bond rates to 30-year highs.
- The BOJ is focused on saving the yen and battling inflation, not pulling the government’s budget out of a ditch.
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