The Butterfly Effect of a Bowl of Rice: Is the "Japanese Moment" of the Global Bond Market Coming?

This summer, the most unexpected "tipping point" in the global financial markets turned out to be a bowl of rice? Japan is currently mired in an unprecedented rice crisis: over the past year, rice prices have nearly doubled, leading to empty shelves and purchase restrictions in Tokyo supermarkets becoming a common occurrence. The "butterfly effect" triggered by all of this is rapidly spreading, impacting Japanese politics, monetary policy, bond markets, and potentially even sparking a global financial market turmoil. In a recent report, France's Industrial Bank pointed out that the upcoming elections in Japan in two weeks have a 50% probability of causing a government crisis. If the political situation becomes unstable, Japanese government bond yields will increase significantly. In the current environment where global fiscal deficits are soaring and long-term interest rates in various countries are highly interconnected, once the Japanese bond market spirals out of control, it could potentially trigger a crisis in the global bond market. Rice prices surge, tearing apart the stability of Japanese society The problem seems to have a simple starting point: there is an issue with the supply of rice in Japan. Due to extreme high temperatures in 2023, government cuts in rice production in previous years, and a rigid agricultural structure, Japan is facing a severe shortage of staple rice, causing rice prices in the summer of 2024 to soar to over 4,200 yen for every 5 kilograms, reaching a thirty-year high. From the demand side, interviewed consumers have stated that they have been forced to reduce the frequency of rice purchases and resort to eating noodles or pasta to get by. Rice is gradually becoming a staple that even the "middle class cannot afford." A deeper issue lies in the long-standing distortion of Japan's agricultural policy. As early as the 1970s, the Japanese government began artificially reducing the production of staple rice to stabilize rice prices and appeal to rural voters, the traditional voter base of the Liberal Democratic Party. As a result, subsidy policies encouraged farmers to plant non-staple "feed rice," leaving them lacking the buffering capacity against extreme weather and structural demand rebounds. Political Storm: A matter of life and death for the elections At the same time, this "rice shortage" is reshaping the political landscape in Japan. According to a recent survey by NHK, a new poll shows that the cabinet led by Fumio Kishida has a support rate of 25.4%, a decrease of 7 percentage points from the previous survey. The 27th House of Councillors election in Japan is scheduled for the 20th. The survey shows that the opposition camp has higher popularity than the ruling coalition, with nearly half of the respondents hoping that the ruling coalition of the Liberal Democratic Party and Komeito will not achieve a majority of seats. In this election, the rice price crisis has quickly become the overwhelming focus on people's lives, with a voter stating in a media interview, "I may not necessarily vote, but I know this government can't handle the rice issue." Although the newly appointed Minister of Agriculture, Forestry, and Fisheries, Taro Kono, has quickly released government rice stocks and set a "target price" of 2,000 yen for 5 kilograms, intending to appease public anger, the results have been limited: supermarkets are quickly sold out, scalpers drive up prices, temporary price drops are followed by rises, further exacerbating market mistrust. More and more voters are directing their anger towards the ruling party. Nomura Comprehensive Research believes that if the Liberal Democratic Party and Komeito lose the majority in the House of Councillors, Fumio Kishida may face pressure to step down, and there are several possible successors within the Liberal Democratic Party, including Taro Kono, Yoshimasa Hayashi, Sanae Takaichi, and others. Rice prices Inflation? Central Bank in a dilemma Even more complicated is the fact that the Bank of Japan seems to be caught in a monetary policy misjudgment regarding the "rice price illusion." Looking at the data, overall CPI inflation in Japan is limited, and "core inflation," excluding food, is even lower than 2%. However, because rice prices carry a high weight in the CPI basket, the "inflation pain" felt by the public is much higher than the statistical figure. As a result, under market pressure, the Bank of Japan has gradually raised interest rates to try to "control inflation expectations." However, the Bank of Japan is actually powerless when it comes to food prices. What the Bank of Japan is good at manipulating is broad monetary conditions, interest rate levels, and credit environment, while the surge in rice prices is caused by structural supply shocks resulting from extreme temperatures in 2023, imbalances in agricultural structures, distortions in domestic subsidy mechanisms, and changes in population structure - all falling under the category of a "policy blind spot." If the central bank were to raise interest rates hastily, it would have little effect on rice prices and may instead suppress consumption and investment, impact the bond market and fiscal sustainability. Especially at a time when wage growth in Japan is weak, and real incomes are continuously declining, a premature rate hike would cause greater harm to households and small and medium enterprises. Ironically, the Japanese government is on one hand trying to alleviate the rice price issue through fiscal means - releasing inventories, subsidizing farmers - and on the other hand, it depends on the Bank of Japan to maintain easing to keep national debt yields low and support highly leveraged fiscal policy. This contradictory combination of "fiscal easing + monetary easing" is extremely difficult to maintain balance in the current inflation environment. Is it time for the "Japanese moment" in global markets? The skyrocketing rice prices in Japan may seem like just a local food issue, but what is uncovered behind it is a highly fragile economic and financial structure facing multiple pressures. Once this crisis spirals out of control, its impact will extend far beyond Tokyo or Osaka, potentially sparking a systemic "butterfly effect" engulfing the global bond and foreign exchange markets: First, the instability in the Japanese government bond market is escalating. As the country with the largest sovereign debt balance globally, Japan's outstanding debt exceeds 260% of GDP, with the fiscal deficit climbing every year. The ability to sustain operations in the past has largely relied on ultra-low interest rates, the Bank of Japan's large-scale bond purchases (YCC), and domestic savings support. However, with rising inflation expectations and the Bank of Japan being forced to make slight interest rate hikes, a trend of rising long-term interest rates has begun to emerge. If post-election political instability or populist fiscal policies intensify (such as further subsidies or tax breaks), it will further weaken market confidence in Japanese bonds, triggering a "selling frenzy." The systemic importance of the Japanese bond market cannot be underestimated: its market size is second only to the United States globally and is widely held by overseas sovereign wealth funds, pension funds, and global asset allocation portfolios. If a sell-off of Japanese bonds occurs, leading to a spike in yields, the long-term interest rate curve globally will face a "passive upward shift," pushing up US and European bond rates, increasing corporate financing costs, and prompting a global reassessment of valuations. Secondly, there is the exchange rate channel. The yen, as the world's third-largest reserve currency, once political uncertainty resulting from election results shakes confidence in Japan's economic policies, it will exacerbate capital outflow pressures. A depreciation of the yen will not only drive up Japan's import-oriented inflation, further pressuring the Bank of Japan to raise interest rates, it may also trigger competitive devaluations of other Asian currencies, increasing financial instability in emerging markets. There are also risks in the TRADELINK pathway. At a critical juncture in US-Japan trade negotiations, the US is demanding that Japan open its rice market and reduce its automotive trade surplus. If Japan refuses to compromise due to domestic public pressure, it could trigger a new round of retaliatory tariffs from the US, tearing apart the existing trade chain in the Asia-Pacific region and reproducing the spillover effects of the "US-China trade war." The currency market is already on high alert; the USD/JPY has broken through the 145 level. UBS predicts that if political uncertainty escalates in July and trade negotiations break down, USD/JPY may retest the 150 level, further triggering a sell-off of the yen - especially in a situation where many companies expect the tariff talks to be resolved smoothly. In addition, the upcoming House of Councillors election and the ensuing political uncertainty may further depress the yen. Taking a broader view, this crisis in Japan is actually a microcosm of a global structural shift amid inflation: climate change disrupting supply, global geopolitical realignments making food security a policy priority, and governments using populist measures to intervene in prices short-term, ultimately leaving them to foot the long-term bill. As warned in the latest research report by France's Industrial Bank, the upcoming House of Councillors election in Japan will be a "stress test for global markets": if the Liberal Democratic Party loses a majority, leading to political changes and policy fluctuations, the market will re-evaluate the logic of "risk-free Japanese government bonds" and trigger cross-market adjustments. This could very well be the starting point of the next financial storm. A bowl of rice is not just a matter for Japan From rice farmers in Yamagata Prefecture to housewives in Tokyo, traders on Wall Street, negotiators in Washington, to interest rate decision-makers in central banks around the world, the rice crisis has already transcended Japan's borders. When a developed country falls into a political and financial crisis because it cannot guarantee its people three meals a day, we must realize that this is not just a food or inflation crisis, but a warning of structural governance failure. Yes, indeed, a bowl of rice can truly shake the world. This article was originally published by "Wall Street News," written by Shuqing Bu; edited by Jia yin liu.