Japan Economic & Financial Weekly

Long-term and super-long-term JGB yield scenario for July 21-24

We expect JGBs to be rangebound during the week of July 21. Key domestic factors likely to affect the market include (1) the endpoint for the Takaichi administration’s “responsible and proactive fiscal policy” and (2) the feasibility of revising the GPIF’s policy asset mix. Overseas factors to watch include (3)developments in the Middle East and (4) expectations regarding the Fed’s next move. However, none of these appears likely to resolve immediately. While short-term trading driven by news headlines may fuel market volatility, end-investors are expected to remain on the side lines, leaving the overall market lacking a clear sense of direction. Attention should also be paid to the ongoing correction in AI-and semiconductor-related stocks. If the global equity sell-off accelerates, market liquidity could decline as investors’ risk tolerance diminishes and leveraged positions are unwound. This could potentially contribute to a twist-steepening (a bull/bear steepening) of the JGB curve.

The final form of the Takaichi administration’s “responsible and proactive fiscal policy” remains unclear in many respects (Table 1). Jiji Press reported on July 14that the Cabinet could approve the government’s Basic Policy on Economic and Fiscal Management and Reform (“Basic Policy”) as early as July 21. Meanwhile, Prime Minister Sanae Takaichi said during a party leaders’ debate on July 15 that she had wanted to finish up discussions on a de facto zero consumption tax rate on food items before summer, but that completing the necessary work by early August should still be feasible. Nikkei reported that the Basic Policy will indicate that a decision will be made in early August. Bond market participants ultimately want to know how large the administration’s “responsible and proactive fiscal policy” will be, how it will be funded, and how it will affect JGB supply/demand. However, we expect the Basic Policy will contain few concrete numbers regarding the scale or funding of fiscal measures.

For instance, the draft revealed on June 30 states that “with respect to the size of the investment framework for a ‘strong and prosperous Japan’, the government will secure necessary funding while ensuring fiscal sustainability (English translations of the draft are by MUMSS)” and that “areas of particular importance to economic security will be managed separately in special accounts through the issuance of bridge bonds backed by specified redemption resources, after securing funding on a multiyear basis.” That said, it is unclear how much funding the government believes can be secured.

The draft also states that in the newly established investment framework for a “strong and prosperous Japan,” ministries and agencies will be able to “make appropriate requests for necessary amounts, including item-based requests, without any ceilings on the requests, and irrespective of the amount budgeted in the previous fiscal year, so that genuinely effective investment support measures can be incorporated.” The final size of this framework will presumably be kept within a range consistent with “fiscal sustainability,” but it is unclear how large the requests from individual ministries and agencies will be. (The deadline for budget requests is typically at the end of August.) Total budget requests amounted toJPY117.6 trillion in FY2025, compared with total expenditures of JPY115.1 trillion in the initial budget proposal, and JPY122.4 trillion in FY2026, vs. JPY122.3 trillion in the initial budget proposal. The Takaichi cabinet has also pledged to incorporate expenditures previously included in supplementary budgets in the initial budget and to formulate budgets reflecting growth in prices and wages, which should provide additional upside for spending.

Special Adviser to the Cabinet Masahiko Hosokawa, a professor at Meisei University, stated in the “Seiron” column of the July 16 Sankei that the figure of more than JPY370 trillion in public- and private-sector investment is “not a plan, ”noting that “the amount of government support will become clear only after its effectiveness is assessed during the forthcoming budget formulation process(English translations by MUMSS).” He stated that there was a “misunderstanding” with regard to the JPY10 trillion in annual government expenditures, explaining that “this was merely a mechanical assumption used to project the economic and fiscal outlook and does not represent government spending for the JPY370 trillion in public- and private-sector investment.” In any event, concrete revenue and expenditure figures will not be available for some time yet, and in the meantime the JGB market may be swayed by a variety of speculation and noise.