Japan’s often described as a kind of paragon when it comes to the contention that advanced, hard currency-issuing economies aren’t subject to fiscal-monetary constraints.

This is going to a busy enough week on its own, so I won’t subject readers to an exhausting Monday harangue purporting to adjudicate sundry debates about Haruhiko Kuroda’s legacy, but suffice to say Japan served as the laboratory for history’s most audacious experiment in ultra-accommodative monetary policy.

At the center of that experiment was a government bond-buying program which left the central bank holding more than half the JGB market, which at various intervals ceased to function due to the size of the BoJ’s footprint.

Ultra-accommodative monetary policy, including a central bank-imposed cap on 10-year yields, facilitated fiscal largesse on a cartoonish scale and for so long that no one even bats an eye anymore at metrics which, in the context of any other nation, would be viewed as a harbinger of imminent doom. Metrics like a public debt load that’s well more than twice the size of Japan’s economy.

Long story short, Japan engaged in an increasingly immodest circular funding scheme in a decades-long quest to exorcise the deflation demon, and some worry the country’s policymakers haven’t given enough thought to the “day after,” so to speak. Put as a question: What happens if the dog catches the car?

With that in mind, super-long JGB yields rose sharply on Monday in what some described as a hopelessly illiquid trade. As the figure below shows, the single-day selloff at the 40-year point — some 18bps — was the largest since April in and around the “Liberation Day” turmoil.

Recall that the finance ministry was forced in May to consider trimming super-long issuance in response to market concerns about worsening government finances. That helped stabilize the situation, but it looks like the respite may prove fleeting.

As the chart header notes, there’s a parliamentary election coming up, and a public opinion poll released Monday appeared to bode ill for the LDP, which lost its lower-house majority last year. A poor result for the ruling coalition in upcoming elections for the less-powerful upper-house could put pressure on Shigeru Ishiba to step aside.

The irony here’s eye-watering. Japanese voters are displeased at inflation, which is precisely what Japan worked so hard to engineer in the decades before the pandemic and prior to the war in Ukraine. Be careful what you wish for.

Ishiba’s (splintered) opposition is promising sales tax cuts to help cushion the blow to households from inflation. Depending on the proposal, the cost of those tax cuts could be between JPY5 trillion and JPY13 trillion.

Ishiba thinks the tax cuts are a bad idea which could worsen the country’s fiscal trajectory. He’d rather just give everybody a one-time stimulus check that works out to about $150 at a cost of JPY3.5 trillion, which the government could fund without issuing new debt.

Monday’s selloff in super-long Japanese bonds was in part attributable to the perception that the opposition’s proposals — and therefore the opposition’s candidates for open upper-house seats — are more popular among voters. Further, a strong showing for the opposition would presumably mean pressure on the BoJ to slow the pace of rate hikes, which could pressure the yen and exacerbate FX pass-through inflation.

The BoJ’s quarterly household survey, released on Monday, showed consumers expect annual inflation to average 9.9% over the next five years, a record high.

Note that Japanese are currently vexed by rice inflation that’s running north of 100% on a YoY basis. According to the ubiquitous “people familiar with the matter,” the BoJ may raise its inflation forecasts later this month at the July policy meeting.

The bottom line is that Monday’s price action at the long-end of the JGB curve was yet another example of markets questioning the notion that for rich, hard currency-issuing monetary sovereigns, the “rules” don’t apply. We’re seeing that proposition tested more frequently and it’s unnerving, particularly in the context of Japan, which is sitting on the world’s largest pile of dry kindling.

I’ve spoken in the past about a “laugh threshold” as it relates to fiscal largesse enabled by monetary authorities. Yes, central banks can beat back the bond vigilantes with interventions, yield-curve control and the like, and no, the vigilantes don’t possess the firepower to challenge an entity like the BoJ. However, there is a limit to this.

At a certain point, the sheer, blatant absurdity inherent in a scheme that entails creating money to buy interest-bearing versions of that same money from yourself in order to cap interest payouts is too circular for people to take seriously.

In the same vein, there’s something profoundly, undeniably and tragically ridiculous about Japan’s predicament. They spent decades trying everything under the sun to create inflation and now that they have it (inflation), the legacy of policy largesse means they have no fiscal headroom available to counter the deleterious impact of inflation on households.