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Japan’s new prime minister Sanae Takaichi is facing rising market scrutiny after proposing a two-year suspension of the 8% sales tax on food and beverages—a move analysts warn could meaningfully widen fiscal strain. OCBC estimates the plan could cost roughly 0.75% of GDP in lost revenue, while economist and former Goldman Sachs FX strategist Robin Brooks warned that campaigning against “excessive” austerity with debt around 240% of GDP invites a harsh market response. The debate is feeding concerns that Japan’s long-end yields could remain under pressure as investors demand a higher fiscal risk premium.

Market impact: Higher JGB long-end yields and JPY volatility; supportive for banks via a steeper curve, but a headwind for rate-sensitive equities and a potential drag on risk sentiment if fiscal credibility concerns deepen.

Japan’s long-end selloff intensified, with 40-year JGB yields surging to record highs (around 4.2%–4.3%) as investors price a higher fiscal risk premium under Prime Minister Sanae Takaichi’s pro-spending agenda—especially proposals to suspend/zero out the consumption tax on food. The spike highlights growing concern that expanded stimulus and tax cuts could widen issuance needs and strain already-stretched public finances.

Market impact: Higher long yields raise Japan funding-cost and duration risk, typically supporting bank stocks but pressuring rate-sensitive equities; spillover into global rates and JPY volatility can rise if markets demand an even larger fiscal premium.

Japan’s Prime Minister Sanae Takaichi said she will dissolve the lower house on Friday (Jan. 23) and hold a snap election on Feb. 8, seeking a fresh mandate for her agenda of bigger fiscal stimulus and tax cuts. Markets are increasingly questioning Japan’s fiscal headroom: the announcement has coincided with a sharp selloff in Japanese government bonds—especially at the long end—as investors price a higher “fiscal premium,” while the yen remains vulnerable amid expectations the BoJ may face pressure to tighten policy faster if currency weakness feeds inflation.

Market impact: Higher JGB yields + higher JPY volatility; supportive for Japanese banks (steeper curves) but a headwind for rate-sensitive equities. If election rhetoric escalates toward larger tax cuts/spending, markets may demand an even bigger fiscal premium.

Japan’s bond rout intensified as fiscal concerns drove yields sharply higher since early November, with the 10-year JGB yield touching 2.30% on Tuesday—its highest in about 27 years. The move reflects rising “fiscal premium” fears ahead of February’s snap election, as investors scrutinize proposed tax cuts and spending plans and demand more compensation for long-duration Japanese debt risk.

Market impact: Higher JGB yields can be JPY-supportive (via wider rate differentials vs past), but also raise rate volatility and pressure duration-sensitive assets; Japan bank stocks may benefit from higher yields, while global rates can see spillover during sharp JGB repricings.

The Bank of Japan is expected to upgrade its growth outlook in its quarterly report due Friday, Jan. 23, and underscore that conditions are increasingly in place for further rate hikes, as a weaker yen and expectations of solid wage gains keep policymakers focused on inflation risks. But Governor Kazuo Ueda is likely to avoid clear guidance on when the next hike could come, with rising JGB yields and fresh political uncertainty after Prime Minister Sanae Takaichi called a Feb. 8 snap election, adding complexity to the outlook.

Market impact: Supports a hawkish BoJ bias (JPY-supportive, upward pressure on JGB yields), but election-driven fiscal uncertainty can keep rate/FX volatility elevated into late January and early February.

Japan’s opposition Democratic Party for the People (DPP) plans to propose issuing ¥5 trillion ($32bn) of “education bonds” annually to double spending on child care, education, and scientific research, according to a draft campaign platform seen by Reuters. The draft also calls for cutting the consumption tax to 5% from 10% until wage growth exceeds inflation by 2 percentage points. To fund the broader package, the party proposes using proceeds from investing ¥180 trillion in FX-intervention reserves, ¥280 trillion in pension reserves, and ¥90 trillion in ETFs held by the Bank of Japan—an approach likely to intensify debate over fiscal sustainability as tax-cut politics heat up ahead of an election.

Market impact: Increased fiscal-loosening risk is typically bearish for JGBs (higher yields) and can add JPY volatility; Japanese equities may see a mixed read-through (growth/consumption support vs higher rates and fiscal-premium concerns).

A Bank of Japan survey for December shows Japanese households continue to expect prices to rise over the next few years, keeping the backdrop supportive for further rate increases from still-low levels. 86.0% of households expect prices to be higher one year from now (vs 88.0% three months earlier), and the average expected price rise is 11.6% (vs 11.9% previously). Looking five years ahead, 83.0% expect prices to rise (vs 84.8%).

Market impact: Elevated inflation expectations keep the BoJ’s tightening bias intact—typically JPY-supportive and a modest upward pressure on JGB yields, while Japanese equities may react mixed (yen-sensitive exporters vs rate-sensitive domestics).

Japan’s Tertiary Industry Activity Index slumped to -2.40 in November (vs 0.00 expected, -0.70 prior), alongside a sharp drop in capacity utilization (-5.3% m/m vs +3.3% expected) and a renewed contraction in industrial production (-2.7% m/m vs -2.6% expected, +1.5% prior). The synchronized weakness across services and manufacturing signals a broader loss of momentum into year-end, raising downside risks for near-term growth and keeping the focus on whether softer demand begins to cool price and wage pressures.

Market impact: Marginally dovish for BoJ expectations—typically JPY-negative, supportive for JGBs, and mixed for equities (exporters may benefit from a weaker yen, while domestic cyclicals could face pressure).

Japan’s core machinery orders—a key leading indicator for business investment—came in sharply weaker in November, with YoY falling -6.4% (vs +4.9% expected, +12.5% prior) and MoM dropping -11.0% (vs -5.2% expected, +7.0% prior). The double miss and abrupt reversal from the previous month’s strength point to a meaningful cooling in capex momentum, reinforcing the risk that domestic demand and corporate spending soften into early 2026 even as inflation dynamics remain in focus.

Market impact: Dovish-leaning for the BoJ path at the margin—typically JPY-negative (USD/JPY higher), supportive for JGBs, and mixed for Japanese equities (exporters may benefit from a weaker yen; domestic cyclicals/banks may lag if growth expectations cool).

Japan decided on January 17 (27 Dey) to withdraw some staff from its embassy in Tehran, after issuing a nationwide “evacuate” advisory for Iran a day earlier that also covers Tehran. Citing the worsening security environment and disruptions to international air links, Tokyo urged Japanese nationals to leave Iran as soon as safe travel is available, while keeping essential personnel in place for consular support; Japan also issued Level 1 “exercise caution” advisories for the UAE, Oman, and Qatar.

Japan’s Thomson Reuters/Ipsos PCSI edged higher to 41.37 in January from 40.96, signaling a small improvement in consumer sentiment. Even with the uptick, the level remains deeply subdued, consistent with households staying cautious amid higher living costs and currency-driven import-price pressure.

Market impact: Generally JPY-neutral and only modestly relevant for rates. For equities, any improvement is marginally constructive for domestic demand themes, but the broader drivers remain wages, inflation, and BOJ policy expectations.

Foreign flows into Japan strengthened sharply. Foreign investment in Japanese equities surged to ¥1,141.4B (vs ¥124.9B previously), pointing to a major pickup in overseas risk appetite for Japan—often linked to equity momentum, governance/earnings narratives, and currency-hedging dynamics. Foreign bond buying also flipped positive at ¥101.1B, reversing prior net selling of -¥223.6B, suggesting improved demand for JGBs alongside the equity bid.

Market impact: Supportive for Japanese equities and, at the margin, can be JPY-supportive if flows are unhedged. If flows are heavily hedged, the FX impact can be muted even as equities benefit. For rates, renewed foreign bond buying can help cap JGB yields, though the dominant driver remains BOJ expectations and domestic duration supply.