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Takaichi cabinet starts to worry about rise in 10-year JGB yield
Long-term and super-long-term JGB yield scenario for February 16-20
We anticipate rangebound trading for long- and super-long-term JGB yields in the week of February 16. While daily movements may be influenced by external factors such as developments in the forex and equity markets, a clear trend is unlikely to emerge.
In the Lower House election on February 8, the ruling coalition secured 352 seats in a historic victory, and on February 9 (Mon) the 10-year JGB yield briefly touched2.290% on concerns about expansionary fiscal policy. But at her press conference that evening, Prime Minister Sanae Takaichi -- who is also president of the Liberal Democratic Party -- stated that the coalition would seek to realize its campaign pledge of suspending the consumption tax on food items for two years without relying on deficit-financing bonds, and that related discussions would take place at the National Conference. Although she had said during the campaign that she would try to pass this measure by the end of FY26, she refrained from committing to a specific timeline at the press briefing. Some market participants appeared to be relieved, having concluded that the ruling coalition’s definitive victory would eliminate the need for Ms. Takaichi to accept the more expansionary tax-cut proposals demanded by opposition parties.
The mood began to shift somewhat after the yen fell, bonds sold off, and the stock market dropped (“mini-Takaichi shock”) during the week of January 19, prompting a heightened awareness within the administration of the need to communicate with the markets and maintain their confidence in the government. That awareness was also evident in the minutes of the January 22 Council on Economic and Fiscal Policy (CEFP) meeting, which were released on January 27. This meeting took place soon after the triple sell-off occurred following Ms. Takaichi’s comment at a press conference on January 19 that the party platform would include a two-year suspension of the consumption tax on food items. On January 20, US TreasurySecretary Scott Bessent attracted global attention by saying there had been “a six-standard-deviation move” in the JGB market over the past two days. The minutes of the CEFP meeting highlighted the concerns held by various private-sector experts (following excerpts translated by MUMSS). These included, “In the current phase of rising interest rates, it is also necessary to pay attention to debt service costs” (Toshihiro Nagahama) and “interest rates and exchange rates are important barometers of market confidence, and I am concerned about recent developments” (Tomoko Namba). There were also comments that “extensive communication is needed” (Namba) and that “it is important to keep regular tabs on debt service costs and to safeguard credibility” (Masazumi Wakatabe).Furthermore, in the “economic and fiscal projections for medium to long term anlaysis” presented by the Cabinet Office at this meeting, the assumed nominal 10-year JGB yield in the high-growth scenario was 2.1% for FY26, whereas the actual market rate was already higher than that. We suspect the government and ruling coalition could no longer afford to regard the rise in the 10-year yield as a “benign increase.” If the 10-year yield rises sharply or if the decline in the yen accelerates before “Sanaenomics” can fully take effect, Prime Minister Takaichi risks depleting the political capital acquired in her landslide election victory. Discussions on how the tax cut will be funded have yet to take place, and it is not clear whether the consumption tax cut will in fact expire after two years. In any case, the rise in interest rates driven by the fiscal expansion narrative does appear to have paused