JGB Market Shifts Focus to ‘Sanaenomics’ Reality; Two BOJ Hikes Seen in 2026
After a turbulent start to the year marked by a 27-year high in bond yields, the Japanese government bond (JGB) market is beginning to stabilize as investors digest the realities of Prime Minister Sanae Takaichi’s resounding election victory. According to a new report from Sony Financial Group, the market has moved past initial fears of unchecked fiscal expansion and is now pricing in a steady ascent in interest rates driven by the administration’s "high-pressure" economic strategy.
Volatility Gives Way to Assessment
In January, the 10-year JGB yield briefly breached 2.3%—a level not seen in nearly three decades—while the 40-year yield spiked above 4%. The sell-off was triggered by aggressive campaign promises regarding food tax cuts, which stoked fears of a deteriorating fiscal position.
However, yields have since moderated, with the 10-year hovering around 2.2%. Takayuki Miyajima, Senior Economist at Sony Financial Group, notes that the "excessive concern" regarding fiscal discipline has receded. Following the election, Prime Minister Takaichi clarified that tax cuts would be contingent on securing funding sources, a move that reassured skittish bond vigilantes.
The Era of ‘Sanaenomics’
The market is now calibrating for "Sanaenomics"—an agenda focused on "responsible active fiscal policy." The administration aims to create a cycle where government investment spurs private spending, leading to higher inflation and nominal growth.
While the immediate fiscal risk premium has faded, structural upward pressure on rates remains. "The bond market is increasingly conscious that the terminal rate and the neutral rate have shifted higher due to rising long-term inflation expectations," the report states. Investors are wary that a prolonged high-pressure economy could entrench inflation, necessitating higher borrowing costs.
BOJ Outlook: The Path to 1.25%
The Bank of Japan remains hawkish. Sony Financial Group’s main scenario projects two additional rate hikes in 2026, targeting June and December, which would bring the policy rate to 1.25% by year-end.
However, the timeline remains fluid. With the BOJ and the government wary of the yen’s weakness fueling import inflation, an earlier move is possible. "If yen depreciation accelerates, a rate hike as early as the March or April meetings comes into clear view," Miyajima warns, pointing to recent comments from BOJ board members emphasizing the link between wages and prices.
Structural Headwinds for Super-Long Bonds
While the panic selling of super-long bonds (20- to 40-year maturities) has paused, yields in this sector are expected to remain sticky. Beyond fiscal worries, a structural decline in demand from major investors, such as life insurers, continues to weigh on the market. Without a reduction in issuance by the government, a significant drop in super-long yields remains unlikely.
As the Takaichi administration prepares its "Basic Policies" for June, the market will remain hyper-sensitive to the interplay between fiscal stimulus and the Bank of Japan's fight to keep inflation expectations anchored.
Norbert Gehrke
