Japan's Nikkei, bonds fall as fiscal concerns swell before election; yen fragile

By Rocky Swift and Junko Fujita

TOKYO, Jan 20 (Reuters) - Japan's Nikkei share benchmark slid for a fourth day on Tuesday as fiscal concerns mounted before a snap election, also driving government bond yields to record highs and keeping the yen fragile.

Nikkei 225 Index .N225 fell 1.1% to 52,988.80, and has lost 2.5% over the last four days in what is set to be its longest selloff in two months.

Demand fell at an auction of 20-year Japanese government bonds (JGBs) JP20YTN=JBTC and yields on the notes touched a record high 3.35% following Prime Minister Sanae Takaichi's campaign pledge to cut sales taxes on food.

A selloff in government debt has sent short- and long-term yields to successive all-time highs on concerns that tax cuts, touted by both Takaichi's ruling Liberal Democratic Party and opposition groups, will impair Japan's already strained finances.

"Concerns about worsening fiscal conditions intensified after reports that ruling and opposition parties were considering adding sales tax cuts to their campaign pledges," said Maki Sawada, an equities strategist at Nomura Securities.

"Rising interest rates are likely acting as a drag on the stock market."

After more than a week of speculation, Takaichi on Monday made it official in calling for a snap election on February 8. She also pledged to suspend the nation's 8% levy on food for two years, a move that would reduce annual government revenue by about 5 trillion yen, according to official data.

"It just plays to that view of highly stimulatory fiscal policy, which is driving that backup in JGB yields but to date not providing any support for the Japanese yen," said Ray Attrill, head of currency strategy at National Australia Bank.

The Ministry of Finance sold about 800 billion yen ($5 billion) in 20-year debt on Tuesday. The bid-to-cover ratio at the auction, a measure of demand, fell to 3.19 from 4.1 at the previous sale in December.

The benchmark 10-year JGB yield JP10YTN=JBTC climbed as high as 2.33%, the highest since February 1999. Yields move inversely to bond prices.

The yen, which sank to a 1-1/2-year low last week, rose 0.1% to 157.91 per dollar, getting a small respite as trade frictions between the U.S. and Europe led to a slide in the greenback.

With U.S. markets closed for a holiday, Japanese shares also took cues from a slump in European equities after President Donald Trump threatened additional tariffs on eight European countries until the U.S. is allowed to buy Greenland.

The broad Topix gauge of stocks .TOPX slid 0.7% to 3,630.34.

In addition to concerns about the scale of Takaichi's fiscal stimulus, the Bank of Japan's lifting of its key policy rate in December and signalling of more hikes on the way, has also put more upward pressure on short-term yields.

The two-year yield JP2YTN=JBTC, the one most sensitive to BOJ policy rates, rose to 1.225%, the highest in LSEG data going back to 2001.

The BOJ is widely expected to keep rates unchanged at the close of its meeting on Friday. But some central bank policymakers see scope to raise interest rates sooner than markets expect to contend with the weak yen, sources have said.