After Shigeru Ishiba's election defeat, Japan's 40-year government bond auction was greeted with policy pressure intensifying and interest rates rising.

Japanese Prime Minister Shigeru Ishiba, who suffered a historic defeat in the recent election, will hold a 40-year government bond auction on Wednesday. This will be the first key test to gauge investors' interest in ultra-long-term bonds. The current market is closely monitoring the direction of Japan's fiscal policy. To appease dissatisfied voters, there is an expectation that the government may increase spending. As one of the most indebted developed countries globally, Japan's bond outlook has raised concerns among investors. The widening of asset swap spreads reflects hidden concerns about this fiscal trajectory. Market analysis indicates that the lukewarm auction is closely related to the fiscal pressure faced by the Ishiba government. Despite the Japanese government planning to issue approximately 28.65 trillion yen of new government bonds in the 2025 fiscal year, a decrease from the previous fiscal year, the massive debt burden still worries investors. The Japanese government's fiscal spending plan reached a new peak in the 2025 fiscal year. The budget totalled 115.54 trillion yen, an all-time high. Social security costs have increased to 38.28 trillion yen due to the intensifying aging population, and debt repayment and interest payments have also reached 28.22 trillion yen. These figures indicate that while the Japanese government is striving to balance economic development with social welfare, it is also facing immense fiscal pressure. Naoya Hasegawa, Chief Bond Strategist at Okasan Securities, pointed out that "although the elections are over, policy uncertainties remain. The market is concerned that the direction of fiscal expansion will increase pressure on the yields of ultra-long-term bonds." He expects demand for this auction to be weak. The recent rise in Japanese bond yields to multi-year highs due to concerns over government spending and the gradual reduction in bond purchases by the Bank of Japan, but strategists believe measures by the Ministry of Finance to reduce long-term bond issuance starting this month could support auction results. Masayuki Oguchi, Executive Chief Fund Manager at Mitsubishi UFJ Asset Management, analyzed that "the reduction in bond supply combined with the end of the elections should allow this auction to proceed smoothly, but concerns about fiscal policy will persist, and bond purchases are not expected to form a sustained trend." It is worth noting that despite the ruling coalition failing to secure a majority in the Sunday Senate elections, Japanese leadership has promised to continue its duties. Ishiba may face increased pressure from the opposition party, which is pushing for tax cuts, while the public hopes to alleviate inflation pressures. Mark Cranfield, a strategist at Bloomberg, believes that the short-term calm in the Japanese government bond market may not last. In order to secure the support of smaller parties, the government may continue its expansionary policies, and the volatility risk of the 40-year bond auction on Wednesday still exists. In addition, the trend of steepening yield curves globally has not subsided, and uncertainties over the results of US-Japan trade negotiations and the policy path of the Bank of Japan will further exacerbate bond market volatility. Masayuki Oguchi emphasized, "The future direction will depend entirely on the coordination of the Bank of Japan's monetary policy and fiscal policy. Until the fiscal policy direction becomes clear, the bond market will continue to be shrouded in cautious sentiment." The outcome of this auction not only affects demand for ultra-long-term bonds but also serves as an important window to observe the sustainability of Japan's fiscal situation and the shift in monetary policy.