Japan PM Takaichi’s budget remarks send `red flag’ to bond markets

Japanese Prime Minister Sanae Takaichi prepares additional budget He was scrambling to help households with living expenses, but this also raised doubts about whether he could keep his promises on debt issuance.

The budget was largely in line with market expectations. about 3 trillion yen ($19 billion), but it comes at a time when Japan is still struggling with high energy prices, rising subsidy costs and a weak yen.

The budget also marks a reversal from its previous position. There was no need to spend extra. He also said total bond issuance for calendar year 2026 will remain unchanged from the original budget plan. According to Bloomberg.

Takaichi tried to allay concerns in the bond market by saying the extra spending would be financed by issuing deficit-covering bonds. But 10-year Japanese government bond The yield rose to 2.809% on May 20, its highest level since 1996, following reports that the government could issue new debt to finance the extra budget.

“Bond markets are many things, but they are not stupid,” said Jesper Koll, senior director at Tokyo-based financial services firm Monex Group. “You can’t increase spending without increasing debt.”

Takaichi’s use of the calendar year time frame caught the attention of Japanese observers.

“No one in Japan has ever made policy based on the calendar year,” Koll said, noting that historically the country’s fiscal calendar ends on March 31. “If ever there was a red flag, this is a red flag.”

In addition to the 10-year run to four-decade highs, 30 year return rose above 4%, reflecting growing concern not only about financial risks but also about inflationary pressures.

“Recent developments, including continued uncertainty in the Middle East, rising commodity prices and increased fuel subsidy spending, have contributed to bond market concerns about Japan’s fiscal health this year,” said Louis Chua, Asia equity research analyst at Julius Baer. he said.

Koll said investors might have more confidence if the government openly announced a 10 trillion yen budget financed by 10 trillion yen in bonds, rather than a smaller package that includes assurances that there will be no additional issuance.

“People actually believe the first one,” Koll said. “Nobody believes the second one.”

However, not all analysts find the package disruptive.

According to APAC economist Krishna Bhimavarapu, State Street Investment Management “views Japan as structurally positive from both an economic and market perspective.” “The additional budget resembles targeted buffering for households facing energy-related price pressures linked to the Iran conflict, rather than a broad stimulus.”

“This ensures that it is consistent with Prime Minister Takaichi’s philosophy rather than a large-scale increase in demand,” he added.

Recent data have strengthened this view. The economy grew by 2.1% on an annual basis in the first quarter, while real GDP increased by 0.5% compared to the previous quarter. Exports rose 14.8% in April from a year earlier, helped by strong semiconductor shipments and AI-driven demand.

Even Koll sees the stock rally continuing, thanks to corporate restructuring, record mergers and acquisitions, activist investors, private equity and domestic business investment.

But the calculus is different for bonds and the yen. The currency remains near the 160 level against the dollar, an area often seen as a potential trigger for intervention.

As for the bond market, Koll said this reflects the “increasing certainty” of inflation, BOJ rate hikes and increased bond supply.