Elections and Budgeting
How Japanese elections and budget cycles affect JGB issuance and market dynamics
Elections and Budgeting
Japanese politics and fiscal processes create predictable patterns in JGB issuance, market positioning, and yield movements. Understanding these cycles helps traders anticipate:
- Issuance calendar shifts: Supplementary budgets → Increased JGB supply
- Policy uncertainty: Elections → Risk premium in yields
- Fiscal stimulus timing: Pre-election spending → Growth/inflation expectations
Unlike some democracies where elections cause dramatic policy swings, Japan’s political system features remarkable continuity—the Liberal Democratic Party (LDP) has governed for most of post-war history. However, leadership changes, coalition dynamics, and budget negotiations still impact JGB markets significantly.
Japan’s Political Structure
Diet (Parliament): Bicameral system
- House of Representatives (Lower House): 465 seats, 4-year terms (can be dissolved early)
- House of Councillors (Upper House): 248 seats, 6-year terms (half elected every 3 years)
Executive: Prime Minister (PM) elected by Diet, typically leader of majority party (LDP)
Elections:
- Lower House: Every ~3 years on average (constitutionally 4 years max)
- Upper House: Every 3 years (half the chamber)
- LDP leadership election: Every 3 years (September typically)
Recent Political Timeline
| Date | Event | Outcome | JGB Market Impact |
|---|---|---|---|
| Oct 2021 | Lower House election | LDP coalition victory | Stability → Yields flat |
| July 2022 | Upper House election | LDP strengthened after Abe assassination | Risk-off → Yields -3bp |
| Sept 2023 | LDP leadership race | Kishida re-elected (unopposed) | Non-event |
| Oct 2024 | Lower House election | LDP lost majority, coalition weak | Uncertainty → Yields +8bp |
| Sept 2027 | Next LDP leadership (scheduled) | TBD | Monitor for policy shift |
Key insight: Japan’s political stability is high, but LDP leadership transitions matter more than general elections for policy direction.
The Annual Budget Cycle
Japan’s fiscal year: April 1 - March 31
Budget Timeline
August-September:
- Ministries submit budget requests to MOF
- MOF begins compiling draft budget
- JGB issuance plan preliminary discussions
December:
- Cabinet approves draft budget (usually mid-late December)
- MOF announces JGB issuance plan for next fiscal year
- Key details: Total issuance, maturity breakdown, auction schedule
January-March:
- Diet debates and amends budget
- Passage required by March 31 (or government shutdown)
- JGB auctions begin for new fiscal year instruments
Example (December 2023 announcement for FY2024):
- Total JGB issuance: ¥171 trillion
- Breakdown: 10Y (¥28.8T), 20Y (¥14.4T), 30Y (¥14.4T), 40Y (¥4.8T), etc.
- Market reaction: In line with expectations → 10Y yield +1bp (minimal)
Supplementary Budgets: The Wild Card
Japan frequently passes supplementary budgets (補正予算, hosei yosan) during the fiscal year.
Typical timing:
- Fall supplementary budget: October-November (most common)
- Emergency budget: Anytime (disasters, crises)
Reasons for supplementary budgets:
- Economic stimulus (counter recession fears)
- Disaster response (earthquakes, typhoons)
- COVID-related spending (2020-2022)
- Election promises (pre-election spending boosts)
Historical Supplementary Budgets
| Date | Size | Purpose | JGB Issuance Increase | Market Impact |
|---|---|---|---|---|
| Nov 2019 | ¥13T | Typhoon response + stimulus | +¥7T | 10Y +3bp (supply concern) |
| Apr 2020 | ¥117T | COVID emergency | +¥90T | 10Y +8bp (then BOJ capped) |
| Nov 2020 | ¥73T | COVID second wave | +¥53T | 10Y flat (BOJ absorbing) |
| Nov 2021 | ¥36T | Post-COVID recovery | +¥22T | 10Y +2bp |
| Oct 2022 | ¥29T | Energy subsidies | +¥16T | 10Y +5bp |
| Nov 2023 | ¥13T | Tax rebates, inflation relief | +¥8T | 10Y +2bp |
JGB market impact pattern:
\[\text{Yield Impact} \approx \frac{\text{Additional JGB Issuance}}{¥10 \text{ trillion}} \times 2\text{-}4\text{ bp}\]Example (October 2022 supplementary budget):
- Announcement: ¥29 trillion stimulus (energy subsidies, tourism support)
- JGB issuance increase: ¥16 trillion (rest funded by reserves)
- Initial reaction: 10Y JGB +5bp (supply pressure)
- 1 week later: BOJ increased bond purchases → Yields back to 0.25% (YCC cap at time)
Key insight: Supplementary budgets → Increased JGB supply → Upward yield pressure BUT BOJ typically accommodates with larger purchases.
Election Cycles and Fiscal Policy
Pre-Election Stimulus Pattern
Political incentive: Incumbent government wants strong economy heading into elections → Fiscal spending increases
Typical pattern (3-6 months before election):
- Announce stimulus package (infrastructure, cash handouts, tax cuts)
- Pass supplementary budget
- Increase JGB issuance
- Economic activity picks up (temporary boost)
- Election held with “strong economy” narrative
Example (2021 Lower House election):
- June 2021: COVID recovery package announced (¥40T)
- November 2021: Supplementary budget (¥36T) passed just after election
- JGB impact: 10Y rose from 0.02% (July) → 0.08% (November) on supply concerns
Post-Election Fiscal Consolidation (Sometimes)
After election victory, fiscal discipline rhetoric returns—but rarely implemented aggressively.
Exception (2012-2013 Abenomics):
- Election December 2012: LDP wins on reflation platform
- Policy shift: Fiscal stimulus + BOJ QE + structural reforms
- JGB market: Initial sell-off (10Y: 0.45% → 1.00% by May 2013), then BOJ QQE capped yields
More typical (2021 post-election):
- Election October 2021: LDP wins, promises fiscal prudence
- Reality: Supplementary budget passed one month later (¥36T)
- JGB issuance continues at elevated levels
LDP Leadership Transitions: More Important Than Elections
In Japan’s parliamentary system, the Prime Minister is chosen by the Diet (parliament), not direct popular vote.
LDP leadership election = De facto Prime Minister selection (when LDP controls Diet)
These transitions matter MORE for JGB markets than general elections because they signal policy direction.
Recent LDP Leadership Changes
| Date | Outgoing PM | Incoming PM | Policy Shift | JGB Market Impact |
|---|---|---|---|---|
| Sept 2020 | Abe Shinzo | Suga Yoshihide | Continuity (Abenomics continues) | Flat (no change) |
| Oct 2021 | Suga Yoshihide | Kishida Fumio | “New capitalism” rhetoric, fiscal caution | +3bp (hawkish tilt) |
| Oct 2024 | Kishida Fumio | Ishiba Shigeru | Coalition weakness, policy uncertainty | +8bp (instability) |
Policy Implications by Leader Type
Fiscal hawks (rare):
- Rhetoric: Balanced budgets, debt sustainability
- Reality: Rarely implement aggressive cuts (political suicide)
- JGB impact: Initial sell-off on supply concerns, then reverses
Fiscal doves (common):
- Stance: “Growth first, consolidation later”
- Policy: Supplementary budgets, infrastructure spending
- JGB impact: Higher issuance priced in → Yields rise modestly
Example (Kishida’s “New Capitalism” - October 2021):
- Campaign rhetoric: Tax hikes on wealthy, fiscal redistribution
- Market fear: Lower growth, less BOJ independence
- 10Y JGB reaction: 0.05% → 0.12% (+7bp spike in one week)
- Reality: Policies watered down, Abenomics effectively continued
- Yield normalization: Back to 0.07% within month
Key insight: Markets react to leadership rhetoric, but actual policy implementation is constrained by coalition dynamics and bureaucracy.
Coalition Politics and Budget Negotiations
LDP governs in coalition with Komeito party (clean government party).
Strong coalition (LDP supermajority):
- Policy flexibility → Predictable budgets → Stable JGB issuance
- Example: 2014-2019 (Abe’s stable majority)
Weak coalition (minority/narrow majority):
- Opposition demands concessions → Spending increases → Larger deficits
- Example: October 2024 election aftermath—LDP lost majority, needed concessions
- JGB impact: Uncertainty + potential larger spending → 10Y +8bp
October 2024 Election Case Study
Pre-election (September 2024):
- LDP polling: Comfortable majority expected
- 10Y JGB: 0.85% (stable)
Election result (Oct 27, 2024):
- LDP: 191 seats (lost majority, needed 233)
- Coalition partner Komeito: 24 seats
- Opposition gains: CDP (Constitutional Democratic Party) 148 seats
- Minority government likely → Need opposition support for budgets
Market reaction (Oct 28-Nov 1):
- 10Y JGB: 0.85% → 0.93% (+8bp)
- Concerns:
- Larger spending to buy opposition votes
- Policy paralysis on structural reforms
- Potential snap election within 12 months
Scenario analysis post-election:
- Best case: Stable minority government, predictable budgets → Yields stabilize
- Base case: Opposition extracts concessions, ¥5-10T extra spending → Yields +5bp higher
- Worst case: Government collapse, snap election → Yields +10-15bp on uncertainty
Market Implications for JGB Traders
Budget Announcement Timing (December)
MOF releases JGB issuance plan for next fiscal year in mid-late December.
What markets watch for:
- Total issuance amount: Higher than expected = supply pressure = yields rise
- Maturity composition: Shift toward longer maturities = curve steepening
- Auction frequency: More frequent auctions = better liquidity vs. larger sizes = indigestion risk
Trading strategy:
- 2 weeks before: Position for expected issuance (historical trend: +2-3% annually)
- Announcement day: React to surprises (typically ±5bp move if >¥10T deviation)
- Week after: Reassess BOJ’s QT intentions (will they absorb supply increase?)
Example (December 2022):
- Expected issuance: ¥168T (based on prior trends)
- Actual announcement: ¥175T (+¥7T surprise due to defense spending increase)
- 10Y JGB reaction: 0.38% → 0.45% (+7bp in 2 days)
- BOJ response: Increased monthly purchases by ¥1T → Yields back to 0.40%
Supplementary Budget Rumors
Supplementary budgets are often “leaked” weeks before official announcement.
Market pattern:
- Rumor phase (Nikkei/Asahi newspapers report): Yields drift higher (+2-3bp)
- Official announcement: “Buy the rumor, sell the fact” → Yields may reverse (-1bp)
- Diet passage (2-3 weeks later): Actual issuance priced in, focus shifts to BOJ response
Example (October 2023):
- Oct 10: Nikkei reports ¥13T supplementary budget coming
- 10Y JGB: 0.75% → 0.77% (+2bp)
- Oct 23: Cabinet approves ¥13.2T budget
- 10Y JGB: 0.77% → 0.76% (-1bp, in line with expectations)
- Nov 10: Diet passes budget
- 10Y JGB: 0.78% (moved on other factors, supplementary budget fully priced)
Election Uncertainty Premium
When elections approach with uncertain outcomes, JGB volatility increases.
Historical volatility pattern:
| Election Type | 1 Month Before | Election Week | 1 Month After |
|---|---|---|---|
| Stable LDP majority expected | Low (±2bp daily) | Low (±2bp) | Low (±2bp) |
| Narrow majority/uncertain | Medium (±4bp) | High (±6bp) | Medium (±4bp) |
| Coalition collapse risk | High (±6bp) | Very high (±10bp) | High (±6bp) |
October 2024 example (uncertain outcome):
- Pre-election month: 10Y JGB range 0.82-0.92% (10bp range, elevated vol)
- Election night: 0.85% → 0.93% (+8bp as results showed LDP weakness)
- Following month: Range 0.88-0.98% (continued uncertainty)
Trading implication: Options premiums spike before uncertain elections (2-week ATM straddles: 4-5bp vs. normal 2-3bp).
Key Takeaways
-
December issuance plan is the big event: MOF announces JGB supply for next fiscal year → Market prices in supply/demand dynamics for entire year ahead
-
Supplementary budgets are frequent: Japan passes 1-2 per year → Average ¥20-30T additional spending → Requires ¥10-15T additional JGB issuance
-
LDP leadership transitions matter more than general elections: Policy direction set by PM → Kishida (2021) caused +7bp spike on “New Capitalism” rhetoric despite LDP continuity
-
Pre-election stimulus is predictable: Incumbents spend 3-6 months before elections → Supplementary budgets → JGB supply increases → Yields rise 3-5bp unless BOJ absorbs
-
Weak coalitions = bigger deficits: October 2024 minority government → Opposition demands concessions → Larger spending → Supply concerns (+8bp reaction)
-
BOJ accommodates fiscal policy: Supplementary budgets increase JGB issuance, but BOJ typically increases purchases to prevent yield spikes → “Fiscal dominance” debate
-
Election uncertainty = volatility premium: Unclear outcomes → Options premiums double → Wider trading ranges (±10bp vs. normal ±3bp)
Conclusion
Japanese political and budgetary cycles create predictable patterns in JGB markets, but the impact is muted compared to other sovereigns due to:
- Political stability: LDP dominance for decades → Policy continuity
- BOJ accommodation: Central bank absorbs supply shocks from supplementary budgets
- Structural demand: Domestic institutional buyers (banks, insurers, pension funds) provide stable bid
However, key events still move markets:
- December issuance plans: Annual supply outlook (±5-7bp on surprises)
- Supplementary budgets: Additional supply 1-2x per year (+3-5bp each)
- Leadership transitions: Policy uncertainty (±7bp for unexpected outcomes)
- Weak coalitions: Fiscal discipline concerns (+8-10bp risk premium)
For JGB traders, monitoring Nikkei newspaper leaks, LDP leadership approval ratings, and coalition dynamics provides early signals of fiscal policy shifts. The October 2024 election demonstrated that even in stable Japan, political uncertainty can quickly add 8-10bp to yields when government composition changes unexpectedly.
Understanding the interplay between political cycles, fiscal policy, and BOJ accommodation is essential for anticipating supply dynamics and positioning around budget announcements.
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