Japan's long-term government bonds plunged sharply, intensifying concerns over fiscal stimulus

Japan's long-term government bonds plunged sharply on Monday (November 17th) as market concerns over the country's fiscal situation intensified. Previously, the market expected that the Japanese government would announce its first economic stimulus package as early as this week.

Bloomberg reported that this decline echoes the sharp fall in the US and UK markets later last week. Specifically, the yield on Japan's 20-year government bonds soared to its highest point since 1999, the yield on 30-year bonds rose by 5 basis points to 3.26%, and the yield on 40-year bonds increased by 5.5 basis points to 3.6%.

Market traders are closely monitoring the actual spending scale in Prime Minister Takashi's early economic plan and weighing the potential risks that an increase in bond issuance could pose to the stability of the Japanese market. Although the Bank of Japan still plans to raise interest rates in the coming months, the data on the contraction of the third-quarter gross domestic product (GDP) released on Monday undoubtedly provided strong support for Takaoka Saiga to roll out her ambitious fiscal stimulus package.

Naoya Hasegawa, chief bond strategist at Okamasa Securities, pointed out: "Investors are cautious about the scale of the government's economic stimulus plan."

He added, "The uncertainty about the impact of the plan on government bond issuance has put selling pressure on long-term bonds."

According to Japanese media reports, the Kaohsiung City Government is currently considering preparing an additional budget in an effort to fund various expenditures for the current fiscal year. This budget size is expected to exceed last year's level of 13.9 trillion yen. This move highlights Kaohsiung's commitment to what she calls a "responsible expansionary fiscal policy", indicating that she is prepared to rely more heavily on fiscal policy to support economic growth.

Goldman Sachs Group's analysis suggests that as investors become increasingly vigilant about stimulus packages that may exceed expectations, Japan's fiscal risk premium is making a comeback, which will put further pressure on long-term sovereign bonds and the yen. Against the current political backdrop, the market is increasingly concerned about the upcoming 20-year Treasury bond auction on Wednesday (the 19th).