Following Japan's general election, Japanese government bonds have performed better than some investors had feared, partly because the proposed reduction in consumption tax on food items, which was introduced before the vote, appears to be progressing at a slow pace. Japanese Finance Minister Tsutomu Katayama added that the plan to end the tax cut after two years remains unchanged, which has reassured bond traders.

Additionally, the yen has strengthened since the weekend, which is also positive news for bonds as it avoids the risk of a negative feedback loop forming between the yen and Japanese government bonds. Fixed-income investors are also more relaxed this week due to a light auction schedule, which will not resume until next week when 5-year and 20-year bond auctions are scheduled.

In January, Japan's fiscal outlook made government bond traders uneasy, but the bond market volatility now increasingly appears to be a necessary phase for the overall market to stabilize. Meanwhile, ahead of the election, the yield curve had already priced in much of the unfavorable news.

This suggests that Japanese government bonds are likely to enter a period of consolidation, with the greatest risks stemming from unexpected developments in other G-10 bond markets.