Japanese asset markets are under pressure after fresh fiscal promises ahead of the February snap election triggered a sharp sell-off in long-dated government bonds. With inflation expectations rising and real rates falling, yen weakness is intensifying, raising questions over the effectiveness of any future FX intervention, ING's FX analyst Chris Turner notes.

USD/JPY drifts toward intervention zone

"Japanese asset markets are taking the strain of local politics. Having announced a snap election for 8 February to improve the Liberal Democratic Party's (LDP) standing, Japanese Prime Minister Sanae Takaichi yesterday promised a two-year removal of the 8% food tax. The bond market has not appreciated these fiscal giveaways and 30-year JGB yields are up a huge 25bp."

"The sell-off at the long-end of the JGB market is sending ripples through bond markets around the globe. With Japan's fiscal pulse in full swing, it seems inflation expectations are on the rise. Derived through the nine-year inflation-linked JGB, inflation expectations are now up to 1.90%. The Bank of Japan is on a go-slow with its tightening cycle, so real interest rates are falling, and this is dominating yen pricing."

"A further sell-off in JGBs would seem to drag USD/JPY towards intervention territory at 159/160. However, if the yen sell-off is a self-inflicted wound from the Japanese government policy, the effectiveness of intervention will become increasingly questionable."