Japan’s long-term bond yields surge as looming election triggers fiscal worries

Subscribe to enjoy similar stories. Japan’s long-term government bond yields surged to multi-year highs Tuesday, spurred by fears that an upcoming election could lead to a consumption-tax rate cut that might worsen the country’s public finances. A key focus of the campaigning will be a potential cut to Japan’s consumption tax, as both ruling and opposition parties seek to win over voters with measures to alleviate the burden of rising living costs.

Prime Minister Sanae Takaichi has already said that her party is mulling a plan to suspend the sales tax on food and beverages for two years. On Monday, she confirmed plans to dissolve the lower house of parliament, saying that official campaigning will start on Jan. 27 and voting on Feb.

8. Such a tax cut could take a big chunk out of government revenue, potentially raising alarm about the sustainability of Japan’s sizable debt. A consumption tax cut could cost around $31 billion annually in revenue, so how they are funded will be important for markets, MUFG Bank’s senior currency analyst Michael Wan said in a note.

“Even if the consumption tax cut is said to be temporary, the risk of it becoming permanent is high and the burden on public finance is significant," Citi Research rates strategist Tomohisa Fujiki said in a report. And if the tax cut coincides with expanded defense spending—another of the Takaichi administration’s policy aims—Fujiki sees a risk that yields on Japanese government bonds could rise to levels where concerns over debt sustainability will intensify. Japan’s bond markets have been signaling worries about more aggressive fiscal stimulus since Takaichi took power in October, and a victory by the ruling Liberal Democratic Party in the election could add to