Japanese Prime Minister Sanae Takaichi's approval rating slumped in July to the lowest since she took office last year, leaving her officials with less political backing to talk down yen and bond market bears. Her spending plans lifted bond yields to three-decade highs in July, while the yen has slid to a four-decade low. The Federal Reserve and the Bank of Japan both hold policy meetings this week.
Takaichi is fighting a losing battle in the polls, which makes a retreat from promised tax cuts more difficult and denies her officials the political backup they need to talk down yen and bond market bears. Her approval rating slumped in July to the lowest since she took office last year.
Rising inflation, blamed in part on high import costs from a weak yen, hit her standing with voters. Takaichi's strong advocacy of fiscal stimulus and harsh criticism of higher interest rates have heightened investor concerns about worsening public finances in Japan, sending bond yields higher.
Bond anxieties blunt the yen defence
Those bond market anxieties have also blunted official efforts to talk down speculative bets against the yen, government sources said. One of them, warning about the danger of being at the mercy of bond vigilantes, said: "Markets are gaining control over fiscal management, which hasn't happened in Japan for decades".
Her spending plans, aimed in part at easing rising household living costs, lifted bond yields to three-decade highs in July on concern over Japan's worsening finances. However, when pressed about her sliding approval ratings, she stressed her determination to break what she called Japan's excessive fiscal tightening with big investment, a sign she had no plans to back down on expansionist policy.
Food levy cut could reignite yields
Despite reservations voiced even within her ruling party, Takaichi is set to proceed with a plan to cut by two years an 8% levy on food, domestic media reported. The move would come as little surprise, but analysts say a lack of funding clarity could further upset bond markets.
Yen sits at a four-decade low before the Fed and BOJ
Takaichi's dovish fiscal and monetary approach has also caused headaches in the currency market, with the yen sliding to a four-decade low. Finance Minister Satsuki Katayama's repeated threats of decisive action have kept markets on edge, yet they have failed to give a sustained boost to the sagging currency. Top currency diplomat Atsushi Mimura has stayed quiet since the record $72 billion intervention conducted between late April and early May that did little to arrest the yen's downtrend.
The communication strategy has shifted away from yen jawboning to giving the bond market more of the clarity it needs. Even so, markets remain unconvinced, with yields on track for further rises amid looming prospects of bigger debt issuance. The yen could see more volatility this week as the Federal Reserve and the Bank of Japan hold policy meetings, and while both are seen keeping rates steady, hawkish hints from the Fed could accelerate yen falls versus the dollar.
Former BOJ board member Takahide Kiuchi said the administration faces two big headwinds — slumping approval ratings and declines in the yen and JGBs — and he does not think Takaichi has fixed either of them.
Source: Investing.com
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