Group 1 - The Bank of Japan officials believe there is no need to change the gradual interest rate hike policy following the election loss of Prime Minister Shigeru Ishiba, and they will closely monitor future fiscal policies of the Japanese government [1][2] - The Japanese yen continues to decline, reaching 147.93 yen per dollar, and the Bank of Japan is expected to maintain the interest rate at 0.5% in the upcoming policy meeting [2] - Inflation risks are rising due to surging prices of rice and other food items, with Japan's key inflation indicator increasing by 3.3% last month, remaining above the Bank of Japan's 2% target for over three years [2] Group 2 - The recent election results have made the ruling coalition more susceptible to opposition influence, which may lead to increased fiscal spending, including calls from opposition parties to lower sales tax to assist families affected by inflation [2] - Despite the election outcome, the Bank of Japan's policy trajectory is not expected to change immediately, although officials will monitor the potential inflationary impact of any significant fiscal policy relaxation by the government [2] - The U.S. has announced a 25% tariff on Japanese goods, but Bank of Japan officials do not anticipate a significant change in economic outlook as they had already projected a temporary economic stagnation in their May report [3]

Core Viewpoint - Japan's economy is in a complex and fragile state, facing high public debt, an aging population, external trade pressures, and potential risks in the financial system, leading to concerns about a possible debt crisis similar to Greece, although short-term risks are mitigated [1] Short-term Buffer - Japan's public debt is projected to reach 1350 trillion yen, accounting for 263% of GDP, significantly higher than Greece's 142% during its crisis [2] - 87% of Japan's public debt is held by domestic institutions, with the Bank of Japan holding 46.3%, which reduces default risk due to currency sovereignty [2] - Japan's net debt level is at 114%, with interest payments projected to be 1.7% of GDP in 2025, approximately 16.5 trillion yen, much lower than Greece's 5% to 7% during its crisis [2] Long-term Challenges - Japan faces significant challenges from an aging population, with social security spending expected to reach 42 trillion yen by 2025, constituting 36% of total government spending [3] - Tax revenue is only 18.2% of GDP, insufficient to cover total expenditures, leading to a growing fiscal deficit [3] - External economic pressures include a depreciating yen increasing import costs, particularly for energy, and potential tariffs on Japanese cars from the U.S., which could result in a revenue loss of $10 billion to $15 billion [3] Monetary Policy Adjustments - The Bank of Japan holds 575.9 trillion yen in government bonds, exceeding 100% of GDP, but rising interest rates have led to unrealized losses of about $200 billion [4] - Insurance companies have also faced losses of around $60 billion due to falling bond prices, impacting their willingness to purchase government bonds [4] - Japanese financial institutions are heavily involved in the $98 trillion "global dollar shadow debt," which could lead to significant losses if global liquidity tightens [4] Political Landscape and Fiscal Policy - The upcoming July Senate elections are critical for Japan's fiscal policy, with the ruling coalition potentially losing its majority, which could lead to increased fiscal deficits due to proposed tax cuts and subsidies [5] - The government faces a dilemma between maintaining fiscal discipline to uphold market confidence and providing subsidies to meet voter demands [5] - Increased defense spending is further constraining budget space, and any relaxation of fiscal discipline could trigger a sell-off in the bond market, reminiscent of the pre-crisis situation in Greece [5]

Core Viewpoint - In the absence of support from the Bank of Japan, the yield curve of Japanese government bonds may continue to steepen, influenced by recent adverse factors and upcoming fiscal measures [1] Group 1: Economic Factors - The ruling coalition in Japan may announce fiscal measures, such as cost-of-living subsidies, before the July Senate elections, potentially worsening Japan's fiscal situation [1] - Recent statements from Japanese life insurance companies indicate plans to reduce their holdings of Japanese government bonds, contributing to the steepening yield curve [1] Group 2: Future Outlook - The clarity of Japan's fiscal policy trajectory and the Bank of Japan's bond purchasing plans will be crucial for stabilizing the long-term yield curve in the coming weeks [1]