Japan’s Finance Minister Katayama may have good intentions, but her comments at Davos could end up causing more problems for the country’s bond market. According to Bloomberg, she stated that the government is trying to maintain fiscal sustainability while increasing spending, which could be a cause for concern for investors. While it makes sense in theory to boost investment to generate future tax revenue, the reality is that the spending part of the equation may end up being more troublesome for markets.

In recent history, we’ve seen similar issues arise in countries like the UK. In September 2022, the government’s spending plans and the potential impact on anticipated central bank policy created a two-fold problem. Firstly, the government’s fiscal initiatives worried investors, causing the pound to weaken against other currencies. Secondly, the Bank of England (BoE) was incentivized to chase the currency, leading to further depreciation.

In Japan, the situation could be even more complicated. With the government’s fiscal plans already worrying investors, the Bank of Japan (BoJ) may feel compelled to chase the yen as well. This could lead to a vicious cycle where any gains made through fiscal initiatives are quickly lost through market movements.

While Katayama’s intentions may be noble, her comments could end up exacerbating market concerns. It’s important for investors to keep a close eye on developments in Japan and how they may impact the country’s bond market.