Japan snap election puts BOJ–fiscal policy clash in focus, Goldman Sachs warned

Japan's snap election emphasizes the clash between the BOJ's tightening policy and fiscal expansion. Scheduled for February 8, the parliament is set to be dissolved this week. Goldman Sachs warns of risks arising from the BOJ increasing rates while fiscal policy expands. They predict two 25bp rate hikes in 2026, raising the policy rate to 1.25%, which is still below many neutral estimates but could increase government borrowing costs. Prime Minister Takaichi is campaigning on 'major policy change,' promoting stimulus and tax relief that investors typically perceive as debt-negative. Media reports have heightened investor unease, with bond yields rising as the debate intensifies over how far fiscal expansion can proceed without conflicting with the BOJ's gradual normalization. Goldman argues that if fiscal policy remains expansionary while the BOJ raises rates, buyers of JGBs may demand a higher term premium. This could create a negative loop where higher yields raise interest costs, increasing fiscal burdens and intensifying scrutiny of Japan’s long-term sustainability. As the election approaches, the market is focusing more on risk premiums rather than a 'Japan crisis,' observing how election promises and coalition dynamics may impact JGBs, yen volatility, and bank equities.