Japanese government long-term bonds briefly climbed to 2.81% on Thursday, July 3 – their highest level in thirty years – prompting one analyst to refer to it as the “honebuto shock,” a reaction to the prospect of larger deficits stemming from the Takaichi government’s pending Basic Policy on Economic and Fiscal Management and Reform (the honebuto) and the Bank of Japan’s sluggish response to financial conditions.
This market movement has put the Takaichi government on the defensive. Chief Cabinet Secretary Minoru Kihara said that the government is “closely watching market trends” and “will take every possible measure to ensure sound economic and fiscal management.”
Finance Minister Satsuki Katayama downplayed the idea that language in the draft honebuto threatens the BOJ’s independence and suggested that the government would manage the scale of bond issuance with an eye towards maintaining market confidence.
Economic Revitalization Minister Minoru Kiuchi suggested that markets were not simply expressing concerns about the Takaichi government’s fiscal policies.
Meanwhile, Centrist Reform Alliance (CRA) leader Junya Ogawa used his press conference on July 3 to criticize the government for irresponsible policies, characterizing the market reaction as a warning signal to the government.
Together with growing signs of discontent within the Liberal Democratic Party – as suggested by Yuko Obuchi’s resignation from the LDP tax commission to protest the government’s consumption tax cut plan – it seems that political friction around the Takaichi government’s fiscal policies is only beginning and will interact dynamically with financial market activity.
Consumption tax talks frozen
The political stalemate in the Diet has extended to the National Conference on Social Security, which has been working on an interim report that will inform the government’s consumption tax plan.
The working committee drafting the interim report has not met since 26 June, preventing the committee from finalizing the interim report before the end of the month and delaying its finalization into July (or later).
The Takaichi government had wanted the report concluded so that it could include a consumption tax cut plan the honebuto, but it may not be deterred by the delay in finalizing a report. At the same time, however, opposition parties may be increasingly reluctant to give their blessing to what looks like a purely partisan measure.
A piece in Diamond describes how the prime minister’s impatience with slower, thorough deliberations led to the near breakdown in the process.
This article is republished with permission from Tobias Harris’s Observing Japan.
