Japan's PM Takaichi Adopts Softer Approach to Soothe Markets Amid Rising Yields Challenging Fiscal Credibility

Market Concerns: PM Sanae Takaichi's $137bn stimulus plan has raised fears about Japan's fiscal sustainability, with rising long-end bond yields and a weak yen contributing to market anxiety.

Government Response: Takaichi is softening her stance on Bank of Japan tightening, promising to limit borrowing and reduce wasteful spending while emphasizing fiscal sustainability.

Market Reactions: The yield on 10-year JGBs has reached its highest level since 2007, leading to increased shorting of the yen and concerns over policy overstretch, with the yen falling approximately 5% since Takaichi took office.

Investor Sentiment: While some investors view yen weakness as inevitable, others believe a stronger yen could emerge if the economy improves, with current JGB buying interest remaining low until clearer issuance guidance is provided.