Japan is about to face its most influential Senate election in recent years, and the ruling coalition led by Prime Minister Shigeru Ishiba may face defeat. In the face of a historic sell-off of the country's national debt, investors are assessing whether the downturn will continue to spread.
According to Zhito Finance APP, Japan is about to welcome the most influential Senate election in recent years, and the ruling coalition led by Prime Minister Shigeru Ishiba may face defeat. In the face of a historic sell-off of the country's national debt, investors are evaluating whether the downward trend will continue.
This week, Japanese government bond prices plunged dramatically, with the yield on 30-year government bonds reaching an all-time high, while the yen against the US dollar and euro fell to several months low. Polls show that in the final stages before voting on Sunday, the support rate for the ruling coalition formed by Ishiba's Liberal Democratic Party and Komeito continues to decline, while emerging parties advocating for increased spending and tax cuts are expected to gain more seats.
Here are the three major scenarios that investors and Analysts are focusing on:
Scenario One: The ruling coalition retains a majority of seats.
Analysts generally believe that if the government can maintain a majority in the Senate, it would be most Bullish for Japanese government bonds and the yen. Although Japan's government debt burden remains the highest among developed countries (about 250% of GDP), there has been a downward trend. Koichi Fujishiro, an economist at Dai-ichi Life Research Institute, pointed out: "It is difficult to determine that Japan's fiscal situation is continuously deteriorating. Once the Senate election is over, the upward pressure on interest rates brought about by expectations of increased fiscal spending may ease."
If Ishiba's coalition wins, the eight-day sell-off of government bonds may reverse—this round of sell-off has already caused the yield on 30-year government bonds to soar 35 basis points to a record level of 3.20% on Tuesday. Analysts at Standard Chartered Bank stated in a report: "If this scenario materializes, some short positions on Japanese government bonds will face risks, as it is expected that Ishiba will resist debt-financed tax cut proposals."
Scenario Two: The governing coalition's influence weakens, Shigeru Ishiba steps down.
The most likely scenario to occur currently is that Shigeru Ishiba's coalition fails to win the 50 seats needed to maintain a majority in the House of Councillors and is forced to seek new partners. The most likely partner for an alliance is the Constitutional Democratic Party, which advocates for the reversal of the Bank of Japan's policy and the restart of monetary easing.
Takashi Fujiwara, the Head of Income Investment at Resona Asset Management, stated that this week's surging government bond yields are precisely the market's preemptive reaction to this. A popular candidate to succeed Shigeru Ishiba within the Liberal Democratic Party is Sanae Takaichi, a supporter of 'Abenomics,' who has publicly called for the central bank to resume monetary easing.
Analysts believe that the political uncertainty triggered by Shigeru Ishiba's resignation could lead to foreign capital selling off Japanese stocks and the yen. TD Securities predicts that the dollar to yen Exchange Rates will 'easily break' the 200-day average of 149.70. However, Yugo Tsuboi, Chief Strategist at Daiwa Securities, points out that for Japanese stocks, the sell-off may be temporary, as the overall policy framework of the Liberal Democratic Party might remain unchanged. He added, 'Conversely, if Shigeru Ishiba stays on, political uncertainty will persist, which would be detrimental to the stock market.'
Scenario Three: The opposition party achieves a great victory.
Analysts warn that a strong performance from the opposition party in the election on Sunday would have the greatest impact on the Japanese market. The three main opposition parties all support some form of consumption tax reduction, with the populist right-wing party 'The Japan Innovation Party' advocating for the complete abolition of the value-added tax.
A report by Barclays analysts noted: 'If the vote share of the Constitutional Democratic Party and the Japan Innovation Party, which advocate for increasing government bonds, exceeds expectations, the bear steepening of the government bond yield curve (where long-term rate increases far exceed short-term) will worsen.' Their calculations show that if the consumption tax is lowered by 5 percentage points from the current 10%, the 30-year yield will rise by 15-20 basis points.
Jin Kenzaki, an analyst at Industrial Bank of France, believes that a coalition government of the opposition may abolish the consumption tax and RBOB Gasoline tax by issuing more government bonds, but the probability of this scenario occurring is only about 10%. However, if it does come true, 'long-term interest rates will rise significantly from the start of the term and remain high.'
