Key facts
- Prime Minister Sanae Takaichi denied her government's economic blueprint caused the recent bond market rout.
- The 10-year Japanese government bond yield reached a 30-year high of 2.865% last week.
- A former central bank policymaker warned that the Bank of Japan might face pressure to increase bond purchases if yields exceed 3%.
- The Bank of Japan is expected to raise its short-term policy rate to 1.25% between October and January.
- The government's economic blueprint emphasizes stable inflation and economic growth while maintaining government-central bank coordination.
Japanese Prime Minister Sanae Takaichi has stated that the government's economic blueprint is not responsible for the recent market rout that has driven Japanese government bond yields to multi-decade highs. The benchmark 10-year yield hit a 30-year high of 2.865% last week, with investors interpreting Takaichi's draft economic blueprint as potentially watering down Japan's commitment to fiscal discipline.
Seiji Adachi, a former Bank of Japan policymaker, warned that the central bank might face political pressure to ramp up bond buying if the 10-year yield breaks above the 3% threshold, which would cast doubt on Japan's fiscal sustainability. He noted that the government likely sees the 3%-3.5% range as a critical line of defense.
Adachi indicated that the Bank of Japan is likely to raise its short-term policy rate to 1.25% between October and January, and potentially to 1.5% or 1.75% next year depending on crude oil prices. While the BOJ has been slowing its bond buying to reduce its balance sheet, it has also reiterated its readiness to counter sharp rises in long-term yields through emergency operations.
The government's economic blueprint emphasizes stable inflation and economic growth while maintaining coordination between the government and the central bank, a stance consistent with Japan's legal framework. The revised draft aims to reassure markets about the BOJ's independence.