The anticipated global crisis is approaching step by step from the East!

The yield on Japan's 10-year government bond rose to its highest level since the 2008 financial crisis as political risks were priced in ahead of the upcoming upper house elections. The interest rate rose 1.5 basis points to 1.59% on Tuesday.

Polls suggest the ruling Liberal Democratic Party (LDP) could suffer heavy losses in Sunday's elections, leading to selling pressure in the market.

Populist Promises and Coalition Concerns

Markets are pricing in the scenario that if the LDP loses its parliamentary majority, it could be forced into a coalition with smaller parties, which could then make promises that would increase public debt. Last year, the LDP lost its majority in the lower house and was forced to forge uneasy alliances with smaller parties.

Analysts warn that the loss of the upper house majority could lead to consequences such as the impeachment of Prime Minister Shigeru Ishiba or early general elections.

INFLATION, LOW WAGES AND HIGH TAXES

Small parties that emerged with populist promises are gaining ground among voters who are reacting to rising costs of living, slow wage growth, and high taxes. Even the LDP was forced to promise cash handouts and measures to lower energy prices before the election.

The total cost to the budget of the parties' promises is around 5.3 trillion yen ($36 billion), according to calculations by Morgan Stanley.

The balance in long-term bonds is being disrupted

According to a report in the Financial Times, in addition to election concerns, a structural supply-demand imbalance is also striking in Japan's long-term bond market. Auctions for 20-, 30-, and 40-year bonds held in May saw weak demand, leading to a spike in interest rates.

The 30-year Treasury yield rose 4 basis points to an all-time high of 3.205% on Tuesday. Mark Dowding of RBC BlueBay called the government's long-term bond issuance, which failed to attract market support, a "policy error."

Budget Balance Outlook Improves

Meanwhile, according to Moody's Analytics, rising tax revenues along with inflation have pushed Japan's fiscal indicators to their best level in recent years.

According to the latest NHK poll, the LDP received 24 percent support, while the main opposition Constitutional Democratic Party received 7.8 percent. Among the smaller, prominent parties, the Sanseito Party, known for its xenophobia, received 5.9 percent support.

WILL AFFECT GLOBAL MARKETS

The rise in yields on 10- and 30-year government bonds in Japan to their highest levels in recent years has also caused volatility in global markets. Rising yields on Japanese bonds could lead to a withdrawal of low-interest Japanese capital from global risk assets and intensify selling pressure in emerging markets.

This situation, particularly for investors who borrow Japanese yen at low interest rates to invest in other markets, known as "carry trades," means portfolio rebalancing and a reduced risk appetite. This volatility in Japan's massive bond market has the potential to push up global borrowing costs.