The benchmark Nikkei 225 Index fell 1.1% to 52,991.10, losing 2.5% over the past four days in the longest sell-off in two months.
Short- and long-term interest rates have hit successive record highs on concerns that tax cuts touted by both Takaichi’s ruling Liberal Democratic Party and opposition groups will hit Japan’s already strained finances.
“It’s all fear of Takaichi’s reflationary policies and especially the consumption tax cuts, because she has been unclear about the timing and how she finances them,” said Naka Matsuzawa, chief macro strategist at Nomura Securities. “The bottom line is that no one wants to buy or catch the falling knife right now.”
After more than a week of speculation, Takaichi made it official on Monday by calling for early elections on February 8. She pledged to suspend the 8% national tax on food for two years, a move that would reduce annual government revenue by about 5 trillion yen ($31.6 billion), according to official data.
The yen, which fell to a 1.5-year low against the dollar last week, weakened 0.2% to 158.44. “It simply plays into the view of a very stimulative fiscal policy, which is driving support in Japanese government bond yields, but so far not providing any support for the Japanese yen,” said Ray Attrill, head of currency strategy at National Australia Bank.The Treasury Department sold about 800 billion yen worth of 20-year debt on Tuesday. The bid-to-cover ratio at the auction, a measure of demand, fell to 3.19 from 4.1 at the previous auction in December.
Bond prices accelerated their decline after the auction, pushing yields sharply higher. The benchmark 10-year yield reached 2.35%, the highest level since February 1999. The yield on the 40-year JGB, Japan’s longest maturity, shot up 26 basis points to a record 4.205%.
Investors were already worried about Japan’s deteriorating finances and should now expect a surge in spending regardless of the election outcome, said Eiichiro Miura, senior general manager of investments at Nissay Asset Management.
“The market is lost now,” Miura added. “Market players don’t know at what level to buy JGBs.”
With US markets closed for a holiday, Japanese stocks also benefited from a slump in European stocks after President Donald Trump threatened additional tariffs on eight European countries until the US is allowed to buy Greenland.
The broad Topix stock index fell 0.8% to close at 3,625.60.
In addition to concerns about the size of Takaichi’s fiscal stimulus, the Bank of Japan’s lifting of its key policy rate in December and signals that more rate hikes are on the way have also put more upward pressure on short-term rates.
The two-year Treasury yield, which is most sensitive to the BOJ’s policy rates, rose to 1.225%, the highest in LSEG data dating to 2001, before falling to 1.21%.
The BOJ is widely expected to leave rates unchanged at the end of Friday’s meeting. But some central bank policymakers see opportunities to raise rates sooner than markets expect to grapple with the weak yen, sources said.
($1 = 158.4300 yen)
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