Japan’s bond market is under significant pressure as Prime Minister Sanae Takaichi’s pledge to suspend the consumption tax on food clashes with rising government bond yields, raising doubts about the country’s fiscal discipline.
Takaichi’s promise to halt the 8% food consumption tax for two years, a measure once seen as politically off-limits, has reignited investor concerns over Japan’s ability to manage the world’s largest public debt load. Notably, former prime minister Shinzo Abe, Takaichi’s mentor, refrained from cutting this tax during his tenure and even went ahead with a tax hike in 2019 despite its unpopularity.
The market reaction has been swift. The yield on the 10-year Japanese government bond (JGB) soared by nearly 20 basis points over two trading sessions, reaching a 27-year high. Meanwhile, longer-term bonds experienced heavy sell-offs reminiscent of the UK’s 2022 “Truss shock,” when unfunded tax cuts severely damaged market confidence. Although Japan’s economic and fiscal structure differs, with a more cautious Bank of Japan (BoJ) and a limited pension fund presence in bond holdings, investor unease is growing due to potential fiscal slippage especially as the BoJ reduces its aggressive bond-buying programme.
Japan’s fiscal vulnerabilities are pronounced. Approximately 25% of the national budget is committed to servicing debt, while social welfare costs continue to rise due to an ageing population. Consumption tax revenue makes up more than 20% of total government income, so suspending this tax—estimated to cost around ¥5 trillion annually—poses a significant risk to fiscal stability. Critically, consumption taxes are widely regarded as politically difficult to reinstate once cut.
The government does have tools to mitigate the bond market volatility, including bond buybacks, reducing new issuance, or emergency BoJ bond purchases. However, analysts caution these measures can only provide short-term relief. With elections approaching and political parties competing with promises of tax cuts and increased spending, the risk is that fiscal discipline will be further sacrificed for electoral advantage.
Unless the government can present a credible, sustainable funding plan after the election, bond market volatility is likely to continue. This ongoing pressure could represent a serious challenge to Japan’s fiscal credibility in the medium to long term.
Original Source: Eamonn Sheridan of investinglive.com
