Goldman Sees Higher Japan Bond Premium as Fiscal Worries Return

Goldman Sachs Group Inc. sees a return of Japan’s fiscal risk premium as investors grow wary of a larger-than-expected stimulus package, putting pressure on longer-maturity sovereign bonds and the yen.

Concerns are growing that the Japanese government may back away from its pledge to balance its budget each year and meet its long-term fiscal goals, strategists including George Cole wrote in a note dated Friday. “Even if the eventual outcome turns out to be less extreme than feared, the market’s heightened sensitivity around fiscal concerns suggests any path to ultimate relief could be a bumpy one,” the US investment bank said.

Goldman’s comments reflect unease in the market that long-term Japanese bond yields may rise sharply again, echoing gyrations earlier this year when fiscal concerns that rattled Japanese bonds spilled over into global markets.

Prime Minister Sanae Takaichi has signaled a more aggressive fiscal stance, calling her first stimulus package a launchpad for new investment and growth. Local media reported recently that her government is weighing an of about ¥14 trillion ($91 billion) for the current financial year, potentially larger than last year’s ¥13.9 trillion.

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Japan’s 30-year yield is a few basis points away from a fresh record, while yields on benchmark 10-year bonds rose to 1.72% on Monday morning in Tokyo, its highest level since 2008.

Goldman noted that recently the weaker yen appears to have held less sway on the interest-rate outlook, with fewer indications that the Bank of Japan will raise rates to stem the depreciation. That’s in part due to the central bank exercising patience in assessing the delayed impact of US tariffs and the wage outlook in Japan, it said.

That suggests pressure on longer-term yields may persist until at least mid-December, when greater clarity on the BOJ’s near-term policy may emerge, Goldman strategists wrote. At the same time, the relatively dovish outlook for shorter-maturity notes will remain.

In a separate note, Goldman strategists including Kamakshya Trivedi , head of global FX and rates, said there’s further room for yen weakness in the near-term if the economic environment supports it. The Japanese currency briefly slid past the key 155 per dollar level last week, triggering from officials including Minister of Finance Satsuki Katayama .

Still, dollar-yen upside “should be limited by the risk of more forceful verbal intervention and potential direct operations,” they noted.