TOKYO, Feb 2 (Reuters): Japanese Prime Minister Sanae Takaichi faces a crucial markets test in the final run-up to a snap election this weekend where she is hoping a decisive victory will give her a mandate for expansionary fiscal policy.
The finance ministry will auction some 700 billion yen ($4.5 billion) of 30-year government bonds on Thursday, three days before polls open.
It's a tenor that has been hyper-sensitive to worries about a loosening of fiscal restraint, suffering a rout last month as investors balked at Takaichi's pledge to suspend the consumption tax on food.
Auctions have been a particular flashpoint for investors expressing concern about the state of Japan's finances, which are the worst in the developed world with debt totalling 230 per cent of GDP.
In four of the past five 30-year bond sales, yields spiked to fresh record highs either in the run-up to or immediately following the auction results.
That includes the sharp selloff on October 7, which came just three days after Takaichi - known as a fiscal dove and acolyte of the "Abenomics" policies of late premier Shinzo Abe - won the ruling Liberal Democratic Party's leadership contest, setting her up to become prime minister.
Bond yields move inversely to prices.
"This auction essentially serves as a referendum on how investors feel about the fiscal risks from the election," said Shoki Omori, chief desk strategist at Mizuho Securities.
"I would say demand at the auction is likely to be on the weak side, because investors are going to be cautious. And they have a right to be," Omori added, suggesting that yields could spike after the auction.
The worries are evident in the term premium - the compensation investors demand for holding bonds over a longer time span. Omori said he calculates the 30-year term premium stands at 2.8 percentage points, "way steeper" than the 1.6 percentage points for 10-year JGBs.
This will be the first 30-year debt sale since Takaichi called the snap election on January 19 and pledged the sales tax suspension - and bond markets are likely to be on edge after the latest newspaper polls suggested her LDP is poised for a landslide victory.
