Japan’s Bond Market Faces ‘Truss Moment’ as Liquidity Evaporates

The Japanese Government Bond (JGB) market is experiencing a historic disruption, characterized by a sudden “buyers' strike” that has sent super-long yields skyrocketing. The instability is drawing parallels to the UKs 2022 “Liz Truss crisis,” as fears of unfunded fiscal expansion collide with a fragile liquidity environment.

The 'Buyer Strike'

Volatility exploded following a dismal 20-year JGB auction, where demand collapsed. The sell-off is being driven by Prime Minister candidate Sanae Takaichis pledge to slash the food consumption tax to 0% without a clear funding source.

• 30-year and 40-year yields have spiked over 25 basis points in a single session.
• Domestic insurers, traditionally the anchor buyers of long-end debt, have been net sellers, exacerbating the rout.

BoJs Policy Dilemma

This fiscal uncertainty places the Bank of Japan (BoJ) in a precarious position. While the weak Yen (JPY) has regained some traction due to risk-aversion, the bond market turmoil may force the central bank to intervene to prevent a systemic breakage, essentially capping yields.

Market strategists warn that if the “fiscal expansion” narrative takes hold, the BoJ may be forced into a corner: tighten policy to defend the Yen and curb inflation, or loosen policy to save the bond market. For now, FX traders are betting on Yen strength (USD/JPY lower) on the assumption that the turmoil will force a repatriation of Japanese capital.