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Fiscal Fears Trigger a "Truss Shock" in JGBs

Japan’s government bond (JGB) market was thrown into turmoil last month, triggering a selloff that echoed across global debt markets. The catalyst was a snap election call by Prime Minister Sanae Takaichi, who pledged to suspend a food levy for two years.

This move immediately stoked fears of increased fiscal spending, which would add to Japan's already enormous national debt. In a rout reminiscent of the 2022 "Truss" shock in the UK, when unfunded tax cuts caused a collapse in British gilts, yields on super-long JGBs surged to record highs.

With Takaichi's party poised for a potential landslide victory this Sunday, bond investors remain on high alert. A win would give her a mandate for an expansionary fiscal policy, intensifying concerns over the country's deteriorating finances.

Bank of Japan Remains on the Sidelines

While the market volatility has alarmed the Bank of Japan (BOJ), the central bank is unwilling to step in, according to three sources familiar with its thinking. At this stage, the risks associated with market intervention are seen as outweighing any potential rewards.

Japanese policymakers are caught in a difficult bind. They need to prevent a chaotic spike in bond yields while also trying to support a weak yen through threats of currency intervention. Any attempt by the BOJ to suppress long-term interest rates would directly conflict with its strategy of gradual rate hikes, a policy intended to tame inflation driven by the weak currency.

The tension was evident at the BOJ's policy meeting on January 22-23. A summary of opinions showed one board member calling for vigilance against a "one-sided steepening" of the yield curve, while another warned of high volatility in super-long JGBs.

BOJ Governor Kazuo Ueda also escalated his warnings, describing the recent pace of yield increases as "quite fast" and reiterating the bank's readiness to act only under exceptional circumstances.

A High Bar for Bond Market Intervention

Despite a temporary calm returning to markets, investors are focused on whether the BOJ will intervene if another rout occurs after the election. However, the sources confirmed that recent market moves do not meet the central bank's very high threshold for action.

The BOJ has several tools it could deploy, including:

• Conducting unscheduled, emergency bond-buying operations.

• Adjusting the mix of bonds it purchases under its quarterly plan.

• Suspending or overhauling its bond taper program, which began in 2024.

Intervention would only be considered during a panic selloff driven by speculation or a destabilizing event that forces the central bank to act as the market maker of last resort. Sources say neither of these scenarios has yet materialized. Any action would also be temporary, designed to avoid signaling a new price target for bonds.

"If bonds are being sold on speculative trading, the BOJ could see scope to intervene. But it's clear the recent rise in yields reflects market concern over Japan's fiscal policy," said Takahide Kiuchi, a former BOJ board member. "It's the government's job, not the BOJ's, to deal with the consequences of market distrust over fiscal policy."

Governor Ueda has echoed this sentiment, stating that the BOJ and the government must each play their designated roles, placing the responsibility for managing fiscal-policy-induced yield rises squarely on the government.

The High Costs of Stepping In

The BOJ's reluctance is rooted in the significant costs of intervention. Ramping up bond purchases would undo its efforts since 2024 to gradually shrink its massive balance sheet.

More critically, intervening in the bond market would risk dragging the BOJ back toward the yield-curve-control policy it abandoned in 2024. Analysts warn this could trigger a fresh wave of yen selling, as markets would interpret it as a return to monetary easing. A weak yen is already a major headache for policymakers because it drives up the cost of imports and fuels inflation.

"Trying to push down bond yields would send a conflicting message to markets at a time the BOJ is raising its short-term policy rate," said Mari Iwashita, an executive rates strategist at Nomura Securities. She added that it would also risk the BOJ's credibility by stoking fears it is directly financing government debt.

Some analysts believe the current market calm could be temporary. With investor concern over Japan's fiscal health unlikely to fade, the JGB market remains vulnerable to sudden and sharp selloffs. Domestic life insurers, historically stable buyers of super-long JGBs, are now pulling back and may even become sellers before the fiscal year ends in March.

"I'm sure policymakers are extremely nervous about the bond market now," said former BOJ official Nobuyasu Atago. "The BOJ would need to act if markets go into a free fall, but stepping in at the wrong moment could amplify panic and make things worse. Either way, it would be an extremely hard decision."

A surprise trade agreement announced by President Donald Trump has capped months of tense, behind-the-scenes diplomacy aimed at repairing a strained relationship between the United States and India. The deal, which Trump claimed would significantly lower tariffs, came after a period of public acrimony that saw both nations on a collision course.

On Monday, Trump announced that he and Indian Prime Minister Narendra Modi had reached an agreement to reduce tariffs on Indian goods to 18%. The deal also reportedly scraps a punitive 25% US duty imposed on India for purchasing Russian oil. In exchange, Trump stated that India agreed to buy $500 billion in American goods, shift its oil purchases to Venezuela, and cut tariffs on US imports to zero.

However, Modi's government has not yet confirmed these specifics, and official documentation codifying the agreement has not been released by either side. The announcement caught many officials in New Delhi by surprise, with senior bureaucrats in the commerce and foreign ministries unaware that a call between the leaders was even scheduled.

A Diplomatic Thaw Behind Closed Doors

The breakthrough follows a period of concerted effort by India to de-escalate tensions. In early September, shortly after meeting with Vladimir Putin and Xi Jinping, Modi sent his national security adviser, Ajit Doval, to Washington.

According to officials in New Delhi familiar with the private discussions, Doval met with Secretary of State Marco Rubio to deliver a clear message: India wanted to move past the recent friction and resume trade negotiations.

Doval reportedly conveyed that while India would not be bullied by the Trump administration and was prepared to wait out his term, New Delhi needed the public criticism to stop so that relations could be reset. At the time, India was reacting to Trump's public insults and the 50% tariffs he had imposed on its goods in August. The US president had described India as a "dead" economy and criticized its purchases of Russian oil.

The first sign of a thaw appeared not long after Doval's previously unreported meeting. On September 16, Trump called Modi on his birthday, praising his leadership. The two leaders spoke four more times by phone before the end of the year, steadily working toward a deal.

India's Long-Term Bet on a US Partnership

Behind India's diplomatic push was a strategic calculation that it could not afford a long-term breakdown in relations with the United States. The prevailing view in New Delhi is that American capital, technology, and military cooperation are essential to counter China and achieve Modi's ambitious goal of making India a developed economy by 2047.

Indian officials see the Trump presidency as a temporary challenge within a much longer strategic timeline. "New Delhi was never going to sever relations with Washington," noted Chietigj Bajpaee, a senior research fellow at Chatham House, pointing to the deep institutional and personal ties between the countries. However, he added that "the irrational exuberance that marked New Delhi's earlier assessments of the bilateral relationship have faded."

This approach was a response to a sharp downturn in relations. Tensions flared in May after Trump claimed credit for resolving a border clash between India and Pakistan, a claim Modi strongly rejected. In June, Modi declined an invitation to the White House, and in October, he skipped a summit in Malaysia to avoid a potentially difficult meeting with Trump.

Mending Fences After a Year of Acrimony

The arrival of new US Ambassador Sergio Gor in New Delhi in December marked a turning point. Gor, a former White House official and member of Trump's inner circle, immediately began working to restore stability. In his first public speech, he characterized the tensions as disagreements among "real friends" and announced that India would be invited to join Pax Silica, a US-led supply chain alliance.

Last week, a meeting between Gor and External Affairs Minister Subrahmanyam Jaishankar signaled further progress. Gor posted on social media that they discussed "everything from defense, trade, critical minerals, and working toward our common interests."

Alexander Slater, former head of the US-India Business Council, said the agreement "appears to conclude a difficult six-month period for US-India relations" and "removes a key impediment to what had been India's gradual but steady alignment with the West."

Balancing US Ties with Strategic Autonomy

Despite the rapprochement, India continues to assert its strategic independence. Modi's high-profile appearance with Xi and Putin was widely seen as a message to Washington that India has other powerful partners. In December, Modi gave a warm welcome to Putin, reaffirming ties with a nation that has been a key supplier of weapons since the Cold War.

India has also been diversifying its trade relationships. Last week, it secured a free trade pact with the European Union after nearly two decades of negotiations. This followed a recent trade deal with the UK, moves intended to show that India was not solely dependent on a resolution with the US. Later this month, Modi is set to host leaders Mark Carney of Canada and Luiz Inacio Lula da Silva of Brazil, further strengthening ties with other global middle powers.

The Unbreakable Economic Ties Driving the Deal

Ultimately, the powerful economic logic of the US-India partnership continues to drive both sides toward cooperation. The United States remains a critical market, receiving about a fifth of India's total exports, including a large volume of mobile phones and electronics vital to Modi's manufacturing goals.

Furthermore, US investment in India is surging. Recent months have seen major commitments, including:

• A combined $52 billion pledge from Amazon.com Inc. and Microsoft Corp. in December.

• A $15 billion investment in data centers announced by Alphabet Inc.'s Google in October.

"The larger geopolitical factors or strategic factors that bind Indian and the US together are still in place," said Milan Vaishnav of the Carnegie Endowment for International Peace. "India requires a great amount of capital of investment of technology transfer... So the US is critical."

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Shifting Growth Priorities In Beijing

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China is launching a major push to build a unified national market, a strategic pivot designed to unleash domestic consumption and power its next phase of growth, a top economic official announced.

Speaking at an Asia-Pacific Economic Cooperation (APEC) meeting in Shanghai, Vice Finance Minister Liao Min outlined the country's plan to shift toward new, demand-driven growth drivers. This move comes as economies across Asia navigate a "pivotal juncture" in the global economic landscape.

"We are pressing ahead with building a unified market to further unleash domestic demand and consumption potential," Liao stated, highlighting that services consumption is already showing strong momentum. "The Chinese economy will be increasingly demand-driven."

Why the Old Export-Led Model Is Breaking Down

This strategic shift addresses growing unsustainability in China's economic model. While the country met its 5% growth target last year, the expansion was lopsided. Exports accounted for a third of the growth, while domestic demand remained sluggish.

This reliance on exports is becoming increasingly precarious amid rising global protectionism. Internally, the model has fueled issues like industrial overcapacity and prolonged price wars, which have intensified trade tensions with global partners. Beijing has now officially designated boosting domestic demand as its top economic priority for the year.

Dismantling Barriers to Fuel Consumption

The core of the new strategy involves dismantling long-standing local protectionism and inter-provincial trade barriers. Chinese authorities have repeatedly identified these internal obstacles as key factors that suppress consumption and distort the market.

To reassure trading partners concerned about a flood of Chinese goods, the government also announced it will cancel or reduce tax rebates on hundreds of products, including solar cells and batteries, starting April 1. This measure is part of a broader effort to manage excess manufacturing capacity.

Recent Stimulus and Policy Support

In support of this new focus, Chinese authorities have already rolled out several targeted measures to stimulate consumption and investment. These initial steps include:

• Public Spending: An initial plan worth US$51 billion (RM200.56 billion) for investment in key national projects.

• Consumer Subsidies: Financial support for a consumer goods trade-in program.

• Monetary Easing: The People's Bank of China delivered a 25-basis-point cut to interest rates on its structural monetary policy tools.

• Credit Incentives: The Ministry of Finance unveiled a series of loan perks to encourage borrowing by both businesses and consumers.

Navigating Domestic Headwinds and Global Risks

Despite these efforts, significant challenges remain. There is growing expectation that Beijing will lower its national economic growth target this year, reflecting entrenched deflation, a multi-year housing slump, and weak corporate and household confidence.

Concerns over debt risks and thinning profit margins at banks will also likely prevent policymakers from deploying more aggressive, large-scale stimulus. This cautious sentiment is already being reflected at the local level, with over a dozen Chinese provinces reducing their economic growth targets for 2026 after President Xi Jinping signaled greater tolerance for slower expansion and warned against wasteful investment.

In his speech, Liao acknowledged the complex global environment, citing ongoing volatility, rising geopolitical tensions, and supply-chain disruptions. However, he emphasized that the Asia-Pacific remains one of the world's fastest-growing regions, with technology and digital transformation unlocking tremendous economic potential despite "persistent headwinds."

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