Ex-Policymaker Points to Government Policy as Market Catalyst

Seiji Adachi, a former Bank of Japan board member who served until March of this year, has issued a stark warning that the recent selloff in Japanese Government Bonds (JGBs) and the yen could intensify in the coming year. He attributes the market pressure directly to the fiscal policy ambitions of Prime Minister Sana Takaichi's administration, suggesting investors are beginning to price in higher risk premiums for Japan's public finances.

Market Movements Defy Conventional Logic

Adachi highlighted a critical anomaly in currency markets. "The yen is weakening despite narrowing Japan-U.S. interest rate differentials, which means it has little to do with BOJ policy," he stated. "I think investors are starting to demand a higher premium for Japan's fiscal risk." This sentiment is mirrored in the bond market, where JGB yields have climbed significantly since Takaichi took office, a move Adachi interprets as a direct reaction to her branded "proactive fiscal policy."

Potential Implications for the BOJ and Financial Stability

The former official outlined serious potential consequences if the rout continues:

  • The Bank of Japan may be forced to reconsider its plans to taper bond purchases.
  • The central bank might need to devise support measures for regional banks vulnerable to massive losses on their JGB holdings.

Adachi concluded with a pointed critique, noting, "It's hard to erase market doubts over Japan's finances after Takaichi so powerfully branded her policies as proactive fiscal policy. Rising bond yields will be the biggest risk to Japan's economy next year." His comments underscore the growing tension between expansive government spending and the central bank's efforts to normalize monetary policy.