TOKYO: Japan will continue to face market jitters over fiscal policy, with the risk of further tax relief raising the prospect of a renewed selloff in government bonds and the yen similar to Britain’s “Truss shock”, a former top currency diplomat says.
Markets remain highly sensitive to the risk that the ruling Liberal Democratic Party could lean toward more sales tax relief to shore up voter support if it senses trouble in the election campaign, said Hiroshi Watanabe, a former vice-finance minister for international affairs.
“We’re somehow managing to hold the line for now, but it’s right at the edge,” Watanabe told Reuters in an interview.
Watanabe, now a visiting professor at Tokyo Seitoku University, oversaw Japan’s currency policy and coordinated economic policy with other countries between 2004 and 2007.
Prime Minister Sanae Takaichi is seeking a mandate for her push to reflate the economy in a snap election on Feb 8.
Japan suffered a broad market rout last month after Takaichi pledged to cut the consumption tax on food for two years, reviving investor concerns about fiscal discipline in a country with public debt more than twice the size of its economy.
Super-long Japanese government bonds sold off sharply, while the yen slid toward levels that had previously triggered yen-buying intervention.
Markets have since stabilised somewhat, with the yen rebounding to around 154 per dollar as speculation grew that Japanese and US authorities had carried out rate checks – normally considered a precursor to actual intervention.
Watanabe warned of a strong reaction from investors to any hint that tax relief could expand beyond current pledges.
“I do think that Takaichi, as well as Finance Minister Satsuki Katayama, have registered the warnings coming from global capital markets,” Watanabe said, adding that caution from major US and European investors had likely tempered policymakers’ public messaging.
Watanabe said concerns over public finances, combined with a structural trade deficit and a lack of clarity over the Bank of Japan’s rate path, would likely limit the scope for a sustained yen rebound.
“There is a possibility that the yen could briefly move into the 140 per dollar,” he said. “But it’s hard to see a situation where yen appreciation continues.” — Reuters
