As Japan approaches its Upper House elections scheduled for July 20, the country's bond market is under significant pressure, raising concerns both domestically and abroad.
Impact of Elections on the Bond Market
Elections, which typically lead to political shifts, could trigger financial volatility. If fiscal policy becomes looser, it may prompt serious changes in the debt market. Given rising inflation and interest rate uncertainty, promises of cash handouts and consumption tax cuts could prove problematic for the financial sector.
Concerns Over Bond Vigilantes and the Debt Market
The term 'bond vigilantes' is once again being actively discussed in financial circles. These investors who back away from purchasing government debt during high-risk scenarios are beginning to focus on Japan again. According to Yardeni Research, the likelihood of a new government moving towards tax cuts and increased spending could trigger their exit from Japanese bonds, impacting the global market.
Risk of Japan's Credit Rating Downgrade
There exists a real risk for Japan's credit rating to face a downgrade. Bloomberg data indicates that the interest payments on government debt are rising quickly, which could have serious repercussions for the country's economy. In 2015, Japan lost its rating when this figure exceeded 13%. Today's situation is much more unstable, and any downgrade would significantly impact international financial markets.
The Upper House elections in Japan could mark a significant turning point for the country's financial and debt sectors, as potential changes in tax policy and credit ratings could lead to far-reaching global economic consequences.
