"Perfect Storm" Approaching! Financial Hidden Worries Dragging Along, Vanguard Long-Term Japanese Bond Buying Halted.

Vanguard Asset Management Ltd., which has always been one of the strongest bulls in Japanese government bonds, suspended its continued purchases of long-term Japanese government bonds at the beginning of this year. Before Japanese Prime Minister Naoto Kan decided to dissolve the House of Representatives early and advocated for a significant tax cut, triggering a severe upheaval in the Japanese bond market, the asset management company had already exited the related bet. Ales Koutny, the head of international interest rates at Vanguard's active fund, said, "This is a perfect storm for long-term Japanese government bonds. The financial support for a country's fiscal spending is limited." Ales Koutny was one of the foreign investors betting on long-term Japanese government bonds, expecting further rate hikes by the Bank of Japan to flatten the yield curve and increase demand for long-term bonds. Despite the background of rising Japanese government bond yields after Naoto Kan took office last October, many investors continued to buy in. However, the recent sharp rise in Japanese government bond yields and the increase in volatility are testing investors' risk tolerance. Japanese Prime Minister Naoto Kan formally confirmed on Monday in a press conference that he would dissolve the House of Representatives on January 23 and hold an early election on February 8. The Prime Minister, who supports expansionary fiscal policy and loose monetary policy, also stated that bold risk management investments are necessary to break free from excessive austerity constraints. Investors' concerns about the rapid expansion of Japanese government spending and the resurgence of inflation have quickly intensified. Meanwhile, the results of the 20-year Japanese government bond auction held just before Tuesday noon showed weak demand, with a bid-cover ratio of only 3.19, lower than the previous auction's 4.1 and below the average of the past 12 months of 3.34. Iichiro Miura, Senior General Manager of NISSAY Asset Management, said, "The weak 20-year Japanese bond auction has sparked further selling of Japanese government bonds today. The market was already concerned about the deterioration of the government's financial situation. Regardless of who wins the upcoming election, government spending is expected to increase." Ales Koutny pointed out that the weak demand in the 20-year Japanese government bond auction on Tuesday, along with a report showing that Japanese life insurance companies are selling long-term bonds, and various "noises" surrounding further fiscal spending, have collectively driven the sharp rise in the 30-year government bond yield. What truly unsettles investors is Naoto Kan's promise to temporarily reduce the consumption tax on food, in order to consolidate her slim majority in the House of Representatives. This measure has reignited concerns in the market about her intentions to promote expansionary fiscal policy. Ales Koutny stated that over 20% of Japan's fiscal revenue comes from the consumption tax, so "any adjustments in this area will have a substantial impact on the government's financial situation." Of course, not all fund managers have been deterred by the recent market volatility. Ranjiv Mann, Senior Portfolio Manager at Allianz Global Investors, said on Tuesday that he is "actively discussing potential opportunities in Japanese government bonds." Last week, Andrew Balls from The Pacific Investment Management Company (PIMCO) also believed that there are opportunities in market volatility. For Ales Koutny, if Japan shifts to a more cautious fiscal spending plan or if the Bank of Japan takes a more hawkish stance, committing to raise rates in March or April, "it will be the key factor for us to resume any buying operations."