Why turmoil around Japan’s new government could wash up in U.S. financial markets. - Agence France-Presse/Getty Images Recent developments overseas have the potential to complicate the White House’s agenda to bring down borrowing costs, while heightening competition for investors in the U.S. and Japanese bond markets. Aggressive fiscal-stimulus efforts by the cabinet of Japan’s first female prime minister, Sanae Takaichi, have created a spike in long-dated yields of Japanese government bonds and further ...

Japan’s 10-year yield BX:TMBMKJP-10Y hit 1.77% this week, up seven-tenths of a percentage point from last year. That’s pathetic by U.S. standards, but, for the first time since shoulder pads were fashionable, Japanese investors can make actual money at home. When you can get paid without leaving your house, the overseas shopping spree ends.This week, all three forces converged in the manner of a bad family reunion.Last June, I laid out why this had to end : Japan’s aging population needs those savings for r ...

Core Insights - Bitcoin recently reached new all-time highs in both U.S. dollar and Japanese yen, driven by the new Japanese Prime Minister Takaichi Sanae's ultra-easy Abenomics policy [1] - The expansionary fiscal policy under Abenomics may lead to increased bond supply, negatively affecting the fiscal outlook [2] - Rising yields on Japanese government bonds (JGB) are impacting investor sentiment and increasing borrowing costs, which could reduce the appeal of riskier assets like Bitcoin [3][4] Bond Market Impact - The 10-year JGB yield reached 1.70%, the highest since July 2008, with a weekly increase of 13.31 basis points and a yearly increase of over 76 basis points [3] - Volatility in Japanese bonds may influence global bond markets, with potential upward pressure on U.S., German, and U.K. yields following shocks in JGB [5] Currency Dynamics - The dollar index has risen to a two-month high, largely due to a 3.5% depreciation of the Japanese yen against the USD since Friday [6] - A stronger dollar often leads to financial tightening, which can limit the upside for Bitcoin and other dollar-denominated assets [7] - While Bitcoin's rally has stalled, gold prices have surged past $4,000 an ounce as investors seek safe-haven assets [7]

Group 1 - Takaichi's victory as Japan's next prime minister raises investor speculation about potential stimulus policies similar to those of Shinzo Abe, which could boost stocks but weaken the yen [1][3] - Takaichi advocates for increased government spending and tax cuts to address rising living costs, while criticizing the Bank of Japan's interest rate hikes [2][3] - The initial market reaction to Takaichi's win saw Japanese shares reach record highs, with the Nikkei index soaring nearly 5% in two trading sessions [3][4] Group 2 - Comparisons are drawn between Takaichi's leadership and Abe's tenure, which saw significant fiscal stimulus and corporate governance reforms that led to a doubling of the Nikkei index [4][5] - Current economic conditions differ from Abe's time, with Japan facing inflation now compared to deflation a decade ago, and the yen has depreciated significantly since Abe's departure [6] - As of Tuesday, the yen traded at 150.67, with expectations of a Bank of Japan rate hike diminishing, leaving the currency vulnerable amid ongoing tariff negotiations with the U.S. [7]

Core Insights - The yen weakened above 150 against the dollar following news of a political victory, indicating a shift in market sentiment [1] - Japanese government bonds experienced a slight decline, reflecting investor reactions to the political developments [1] - The Nikkei 225 equity index surged nearly 5%, reaching a record high, showcasing strong investor confidence in the Japanese stock market [1]

Core Viewpoint - Volatility in Japan's longer-dated government bonds is increasing following Sanae Takaichi's election win, which is expected to impact global markets, including the US and UK [1][2]. Group 1: Market Reactions - Yields on Japan's 40-year debt increased by as much as 17 basis points, driven by expectations that Takaichi's pro-stimulus policies may lead to more government bond sales [3]. - Yields on UK and US 30-year bonds rose by up to six basis points, reaching 5.56% and 4.77% respectively, as a result of the pressure from Japanese bond movements [3]. - Goldman Sachs anticipates that for every 10 basis point increase in Japanese government bonds (JGB), there will be a corresponding rise of two to three basis points in US, German, and UK yields [2]. Group 2: Strategic Insights - Goldman Sachs noted that Japan has been a net exporter of bearish shocks to global long-end rates this year, predicting higher long-end JGB yields and a steeper yield curve following Takaichi's election [4]. - The recent volatility in Japanese government bonds has been a precursor to movements in global counterparts, with concerns over fiscal deficits amplifying the situation [5]. - The sustainability of the long-end selloff will depend on the evolution of the political landscape in Japan [7]. Group 3: Government Actions - Japan's finance ministry has proposed to reduce the issuance of super-long term government bonds in upcoming auctions as a measure to support long-dated bonds [6]. - Investors had been cautious about fiscal spending prior to Takaichi's victory, with opposition parties advocating for tax cuts, indicating a complex political environment affecting bond markets [8].

Group 1 - Japanese shares are expected to continue setting records following the election of Sanae Takaichi, who is anticipated to adopt an expansionist fiscal and monetary agenda [1][2] - A "Takaichi trade" has emerged, characterized by long positions on stocks and bearish positions on Japanese government bonds, particularly longer maturities, in anticipation of her victory [2] - The Nikkei index reached a record closing high of 45,769.50, driven by investor optimism regarding a more dovish successor to Prime Minister Ishiba [3] Group 2 - Short positions on the Nikkei index have been accumulating, which may lead to a short-covering rally, potentially pushing the index towards the 47,000 level [4] - The Japanese government bond market has faced challenges due to declining demand from traditional buyers and concerns over increasing debt, with the 30-year JGB yield reaching a record 3.285% [4][5] - Recent market dynamics showed a slowdown in the Nikkei's momentum, with longer-term JGBs rallying as Takaichi appeared to moderate her stance on fiscal policies [6]

Core Viewpoint - Japan is facing an unprecedented rice crisis, with rice prices nearly doubling over the past year, leading to empty supermarket shelves and purchase limits, which is impacting the political landscape, monetary policy, and bond markets, potentially triggering a global financial market turmoil [1][10]. Group 1: Economic Impact - The price of rice has surged due to severe supply issues, with prices reaching over 4,200 yen for 5 kilograms, marking a 30-year high [3]. - Consumers are reducing their rice purchases, opting for alternatives like noodles, indicating that rice is becoming unaffordable even for the middle class [6]. - The crisis is exacerbated by Japan's long-standing agricultural policies that have distorted rice production, leading to a lack of resilience against extreme weather and structural demand changes [6][10]. Group 2: Political Consequences - The rice crisis is reshaping Japan's political landscape, with recent polls showing a significant drop in support for the ruling party, which may lead to a government crisis following the upcoming elections [7][8]. - The crisis has become a focal point for voters, with many expressing dissatisfaction with the government's handling of food security [7][8]. - If the ruling coalition loses its majority, it could lead to increased political instability and pressure on the current leadership [8][10]. Group 3: Monetary Policy Challenges - The Bank of Japan is facing a dilemma as rising rice prices contribute to public perceptions of inflation, despite overall CPI remaining low [9]. - The central bank's attempts to control inflation through interest rate hikes may not effectively address the root causes of the rice price surge, which are structural in nature [9]. - The conflicting need for fiscal and monetary policy to support the economy while managing inflation creates a challenging environment for Japan's financial stability [9][10]. Group 4: Global Implications - The rice price crisis in Japan could have far-reaching effects on global markets, particularly in the bond and currency markets, as Japan holds a significant amount of global sovereign debt [10][11]. - A potential sell-off in Japanese bonds could lead to increased yields globally, affecting financing costs and triggering a reevaluation of risk across markets [11]. - The situation may also impact trade relations, particularly with the U.S., as Japan faces pressure to open its rice market amid ongoing trade negotiations [11][12].

Core Viewpoint - CITIC Securities reports that Japanese government bond yields are likely to remain high in the short term due to the gradual exit from ultra-loose monetary policy by the Bank of Japan and the upward pressure from U.S. Treasury yields [1] Group 1 - The long-term Japanese government bond yields have reached historical highs, indicating a significant shift in the market [1] - The primary reason for this trend is the unsustainable nature of the previous ultra-loose monetary policy, leading to a reduction in bond purchases by the Bank of Japan [1] - The recent rise in U.S. Treasury yields has acted as a catalyst for the increase in Japanese bond yields [1] Group 2 - Short-term Japanese bond yields are expected to remain elevated, while the medium-term outlook will depend on the actions and stance of the Bank of Japan [1]