JPY and JGBs slide as election talk fuels stimulus bets – BBH

JPY and JGB slide, while the Nikkei rallies as Japan election talks fuel bets of more government stimulus. According to Kyodo News, Japanese Prime Minister Sanae Takaichi plans to announce a dissolution of the lower house of the legislature on January 23, paving the way for a snap election in February, BBH FX analysts report.

BOJ intervention risk rises with USD/JPY near 160

"Takaichi does not need to call a general election until October 2028, but she may want to capitalize on her high approval rating (of nearly 70%) to regain her party’s (LDP) majority in the lower house. That has raised concern over a further loosening of Japan’s fiscal discipline as reflected by the underperformance in JPY and JGBs."

"Worries over Japan fiscal profligacy are overdone. Japan nominal GDP growth is running at around 4% and leading indicators point to an encouraging growth outlook, while 10-year government bond yields are closer to 2%. With growth comfortably exceeding borrowing costs, Japan can sustain primary budget deficits without putting its debt ratio on an upward trajectory. In this environment, fiscal sustainability is far less fragile than markets currently imply."

"In the meantime, the risk of BOJ intervention to curtail JPY weakness is rising with USD/JPY closing-in on 160.00. Japanese Finance Minister Satsuki Katayama reiterated her 'concerns about the one-way weakening of the yen', adding that 'Treasury Secretary Bessent shares those concerns'. The chair of Japan’s biggest business lobby Keidanren also chimed in cautioning that the current yen weakness is a bit excessive and a correction for stronger yen is needed. In its last two FX interventions, the BOJ bought ¥9.79 trillion from April 26, 2024 through May 29, 2024 after USD/JPY rallied by 5.7% in 20 days to a high of 160.17. And, the BOJ bought ¥5.53 trillion from June 27, 2024 through July 29, 2024 after USD/JPY rallied by 4.2% in 30 days to a high of 161.95."