"Sell Japanese Government Bonds"... Funds Flock to Stocks

Concerns Over Consumption Tax Cut
Overseas Investors Sell Government Bonds
10-Year Yield Hits Record High

The Japanese stock and bond markets are showing contrasting trends. While concerns over fiscal expansion policies, such as a potential consumption tax cut, have triggered a wave of government bond selling, the stock market is seeing an influx of funds driven by growth expectations.

Yonhap News Agency

The Nihon Keizai Shimbun (Nikkei) reported on January 23 that "opinions urging the sale of Japanese government bonds are pouring in among overseas investors." Kenneth Armstead, founder of the U.S. investment advisory firm Alpha Management, told the Nikkei that "since April last year, we have been operating Japanese Government Bond (JGB) futures with a 100% short position" and that he is "also recommending clients to sell Japanese government bonds." According to Bloomberg, Vanguard, a global asset management company managing 12 trillion dollars worldwide, has also reportedly halted purchases of ultra-long-term Japanese government bonds.

As selling pressure intensifies in the bond market, Japanese government bond yields are surging. On January 20, the yield on newly issued 10-year Japanese government bonds briefly soared to 2.38% during the session, marking the highest level in 27 years. The yield on 40-year Japanese government bonds also surpassed 4% for the first time ever on the same day.

The recent sharp rise in Japanese government bond yields is attributed to both expectations for the Bank of Japan (BOJ) to normalize monetary policy and moves by politicians to expand fiscal spending. The BOJ ended its negative interest rate policy last year and has left open the possibility of reducing large-scale government bond purchases and further rate hikes. However, at this month’s monetary policy meeting, the prevailing view is that the BOJ will keep rates unchanged.

Additionally, the Japanese political establishment’s prominent pledges of fiscal expansion, such as a consumption tax cut, ahead of the early general election scheduled for February 8, have further fueled the rise in government bond yields. To fill the fiscal gap created by reduced tax revenues, the Japanese government would need to issue additional government bonds. This would increase the supply of bonds, causing bond prices to fall and, as a result, government bond yields to rise. The Nikkei estimates that a consumption tax cut would reduce tax revenue by about 5 trillion yen.

In contrast, funds are pouring into the stock market. According to the Tokyo Stock Exchange, foreign investors made net purchases of over 1.2 trillion yen in Japanese stocks between January 5 and 9, the largest amount in three months. Buoyed by this buying momentum, the Nikkei 225, Japan’s benchmark stock index, surpassed the 54,000 mark for the first time ever on January 14. Expectations that Prime Minister Sanae Takaichi’s victory in next month’s early general election would accelerate fiscal stimulus and economic growth policies have been cited as factors driving bullish sentiment in the stock market.

Investing.com analyzed that "the Japanese Nikkei index reached an all-time high on expectations that Prime Minister Takaichi could implement more fiscal stimulus measures if she strengthens her position in parliament through the early general election."

There are also forecasts that the Nikkei index could reach the 60,000 level. Kevin Zhao, Managing Director at Advent Capital Management in the United States, expressed optimism, saying, "If the Takaichi administration wins the election, the short-term 'Takaichi trade' will turn into a medium- and long-term 'Takaichi investment,'" and predicted that the Nikkei index could rise to 60,000 yen.