Japan’s Sales Tax Cuts Could Trigger Sovereign Downgrade: JPM

Prolonged debates over Japan’s consumption tax cuts and sovereign downgrade concerns are likely, keeping investor sentiment toward JGBs depressed for an extended period, according to JPMorgan.

• The surge in volatility may lead to unwinding of flatteners by foreign investors, as well as slower pension rebalancing if the stock rally stalls, strategists including Takafumi Yamawaki wrote in a note Wednesday
• There may also be position adjustments as the Financial Services Agency inspects unrealized losses on JGBs held by regional banks, and accelerated selling of super-long bonds by lifers as rising rates shorten liability duration
• Short-term responses over the next week to ...