We may have a problem in Tokyo.

Last week, I contextualized another steep selloff in long-tenor JGBs by way of upcoming legislative elections which had the potential to jeopardize Shigeru Ishiba’s premiership.

If you missed “Meanwhile, In Japan” I’d modestly suggest you take this opportunity to peruse it, but the (very) short version goes like this. Ishiba lost his lower-house majority last year, and a poor result for the ruling coalition in this weekend’s elections for the less-powerful upper-chamber could put pressure on him to step aside.

That’s trouble because although the fractured opposition doesn’t agree on every detail, they’re a semblance of united on a plan to cut Japan’s sales tax as a way of shielding households from high inflation. Ishiba, by contrast, favored one-off cash handouts of — and try not to laugh — $135, an idea which many voters understandably viewed as insufficient to address what some characterize, rightly or wrongly, as a burgeoning cost-of-living crisis exemplified by triple-digit YoY inflation for rice.

The nation’s most prominent inflation measure cooled in June to 3.3%, but it ran 3.7% the month before, the quickest in two years.

As noted in the linked article above, this is all supremely ironic. Japan spent decades pushing the boundaries of in-tandem fiscal-monetary largesse in a desperate bid to create inflation where there wasn’t any, and no sooner had they escaped the deflation black hole than voters demanded action to curb inflation.

Ishiba argues that cutting the sales tax would worsen Japan’s fiscal trajectory. In addition to making his tenure as prime minister potentially untenable, failure of the Liberal Democratic Party and its coalition partner to win at least 50 of the upper-house seats contested over the weekend would suggest to markets that appeals to fiscal responsibility are falling on deaf ears among the Japanese electorate. That, in turn, could push super-long yields even higher.

Although the pressure abated headed into the weekend, both 20- and 30-year yields rose to the highest levels in a quarter century early last week.

Naturally, there was talk of a “Liz Truss moment” should the upper-house vote go poorly for Ishiba’s LDP and Komeito, its junior partner.

In a note published on July 14, Deutsche Bank’s Mallika Sachdeva suggested Japan’s strategy of balance sheet redistribution “may have reached its limit.”

“Japan’s 12 years of extraordinary economic policies are coming to a head — inflation has arrived, and while the government would benefit from letting it run hot, households are now pushing back,” Sachdeva said. “The same inflation that improves the government balance sheet hurts households [which] have a high proportion of savings in deposits, insurance and pension products which are all negatively exposed to higher inflation.”

Exit polls on Sunday suggested the LDP-Komeito alliance was likely to lose a lot of seats, and could well fall short of the 50 needed to retain an upper-house majority. I’ll have more to say about this once the results are in, Ishiba responds and the market has a chance to price the outcome. But just note that this is a potentially consequential development.

“We’re fully aware [of] voices in the market pointing out concerns over future fiscal management,” Japanese Finance Minister Katsunobu Kato said late last week. “We will continue to respond carefully to these kinds of market signals and manage government bond policy responsibly.”