Investment splurge may lift bond yields further

The government’s new investment target may well turn out to be smoke and mirrors. But large-scale attempts to influence private investment decisions could result in resource misallocation and lower productivity growth. And there’s a risk that the government doubles down on its efforts to steer the composition of the BoJ Board in a more dovish direction in order to keep short-term borrowing costs low. This could backfire by lifting inflation compensation and long-term JGB yields.