It seems like former central bankers in Japan are not shying away from the press, amid intense scrutiny against the BOJ and the government. I guess it’s easier when you’re not the one in the hot seat, eh?
Adachi says that the government’s fiscal policy ambitions have driven markets to sell Japanese bonds and the yen currency. Adding that things could worsen further for domestic assets come next year.
For some context, Adachi was part of the BOJ up until March this year. So, he’s one of the more recent policymakers to comment but then Takaichi’s reign is something that the central bank was not prepared for earlier in the year. I mean, clearly they were not expecting such a drastic change even with some backlash to Ishiba at the time.
Sanae Takaichi
In any case, Adachi mentions that:
“The yen is weakening despite narrowing Japan-US interest rate differentials, which means it has little to do with BOJ policy. I think investors are starting to demand a higher premium for Japan’s fiscal risk.”
Adding that the action in the bond market also clearly reflects the latter. That as Japanese government bond (JGB) yields have surged higher since Takaichi took over as prime minister.
He also notes that the BOJ could be forced to rethink its bond taper plans if the rout continues next year. It is either that or the central bank has to think of something to help smaller banks that may be hit with massive losses due to their bond holdings.
In ending, he does deliver a bit of jibe at Takaichi and what he thinks about the situation though:
“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.”
