Goldman: Sustained Sell-Off More Reliant On Cyclical Recovery Than Elex

Goldman Sachs note that "JGB yields continued to climb higher last week in a pro-risk move, as attention draws to the upcoming LDP elections (on September 29) after PM Suga's surprise announcement of his intention not to run for re-election. A few of the candidates that have already announced their intentions to run (Fumio Kishida, Taro Kono, Sanae Takaichi) appear to support additional economic stimulus though precise magnitudes are unclear. With respect to the broader political schedule, the general election of the lower house should follow sometime in October after the term for lower house members expires, (though we see potential for this to get pushed back as far as end-November)."

• "In response to these developments, the Nikkei surged ~5% on the week and the medium-to-longer term JGBs sold off. While scope for greater fiscal spending post-election could be a tailwind for higher JGB yields, a more substantial repricing will rely on the durability of the cyclical recovery and inflation in our view."
• "On the former, while the recovery so far has been lagging other DM markets and the virus situation remains a source of near-term risk, the improved vaccine rollout and acceleration in the domestic fundamentals have led our economists to forecast a meaningful pickup in growth in Q4 (above consensus expectations). On the latter, while inflation has risen somewhat recently, it appears to have decoupled from the broader global cycle and lagged the repricing seen in other developed economies. Given near-term headwinds and the extent of repricing already seen, we prefer to wait until some of the near-term virus headwinds dissipate before adding shorts."