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Market mood remains uncertain amid political realignment and general election
Long-term and super-long-term JGB yield scenario for January 19-23
The 10-year JGB yield is likely to trade around the 2.1% range with significant volatility for the week commencing January 19. Prime Minister Sanae Takaichi now appears almost certain to dissolve the Lower House at the opening of the ordinary Diet session on January 23 and call a general election. There have been some reports that campaigning will start January 27, with voters going to the polls on February 8, while others say campaigning will begin on February 3, with ballots being cast on February 15. But in accordance with the proverb that it is best to “strike while the iron is hot,” we suspect the earlier schedule is the more likely one. On January 15, the leading opposition party -- the Constitutional Democratic Party of Japan (CDP) -- and Komeito reached an agreement to form a new party in preparation for the election. According to an article in the January 16 Nikkei, if all votes from Komeito supporters were to shift away from the LDP, candidates from the ruling party would receive fewer votes than the runner-up in 25 of the single-seat constituencies, or roughly 20% of the total. As a result, the electoral picture has suddenly grown much more uncertain. As the market will effectively be driven by election-related news next week with the potential for major political realignment, we expect the overall mood to remain volatile, with investors closely monitoring campaign developments.
What is problematic for the bond market is the difficulty of envisioning a scenario that would lead to a decline in the 10-year JGB yield, regardless of whether the ruling party secures a victory or faces a difficult contest. Prime Minister Takaichi isframing the election as a vote of confidence in “Sanae-nomics,” including theconcept of “responsible fiscal stimulus.” We think that if the ruling party emergedvictorious by increasing the number of seats it holds, it would add to themomentum for full implementation of the Sanae-nomics agenda. But even if theoutcome for the party is less favorable, we do not think the administration wouldabruptly shift course in favor of fiscal austerity after the election. After all, theopposition parties have consistently argued for tax cuts funded by higher-than-expected tax revenues. Table 1 summarizes the principal campaign pledges madeby each party in last July’s Upper House election. The CDP’s call for aconsumption tax cut and the disbursement of cash handouts is still fresh inmemory. The parties will begin releasing their official campaign platforms startingfrom next week. Key points to watch will include the question of how the LDP willcredibly guarantee that its “responsible fiscal stimulus” will actually be “responsible”and whether the opposition parties can present a persuasive vision for fiscal andeconomic policy that can serve as a credible alternative to “responsible fiscalstimulus.” Under these circumstances, we think that if the weakness in the yenaccelerates next week, the JGB curve is likely to bear flatten on mountingspeculation of an early BoJ rate hike, while if the Japanese currency strengthensagainst the dollar, a bull/bear steepening of the curve is more likely