Former central banker Adachi has warned that the current selloff of Japanese bonds and the yen could continue, reflecting growing concerns about Japan’s fiscal policy. His comments come amid intense scrutiny of the Bank of Japan (BOJ) and the government’s economic strategies. Adachi, who served at the BOJ until March 2023, believes that recent government fiscal ambitions have prompted investors to withdraw from Japanese assets.
The situation has escalated in the wake of Prime Minister Takaichi‘s policies, which have led to a significant rise in Japanese government bond (JGB) yields. Adachi pointed out that the yen is depreciating despite narrowing interest rate differentials between Japan and the United States. He states, “The yen is weakening despite narrowing Japan-US interest rate differentials, which means it has little to do with BOJ policy. I think investors are starting to demand a higher premium for Japan’s fiscal risk.”
Adachi’s analysis highlights a shift in market sentiment, suggesting that investors are increasingly cautious about Japan’s economic stability. The action in the bond market indicates that the selloff is not merely a reaction to BOJ policy but rather a broader concern regarding Japan’s fiscal health. JGB yields have surged since Takaichi took office, further intensifying the pressure on domestic assets.
With bond yields rising, Adachi warns that the BOJ may need to reconsider its plans for tapering bond purchases if the current trend persists into next year. He emphasized the potential for smaller banks to experience substantial losses due to their bond holdings, adding another layer of risk to the financial landscape.
Addressing the government’s fiscal strategy, Adachi remarked on the challenges facing Takaichi, stating, “It’s hard to erase market doubts over Japan’s finances after Takaichi so powerfully branded her policies as proactive fiscal policy.” He identified rising bond yields as a significant threat to Japan’s economy in the coming year.
As these developments continue to unfold, the implications for Japan’s financial stability remain uncertain. Investors will be closely monitoring both government actions and market responses to gauge the future trajectory of Japan’s economy.
