Japanese Yen: Slightly weaker bias as fiscal risks grow – DBS

DBS Group Research economist Chang Wei Liang notes that the Japanese Yen (JPY) could trade slightly weaker as the government reportedly considers a second supplementary budget, with USD/JPY around mid-158. He highlights market unease over renewed fiscal spending, including a planned consumption tax cut, and warns that rising yields and inflation expectations may push the Bank of Japan (BoJ) towards more hawkish guidance.

Yen pressured by fiscal expansion risks

"JPY could trade slightly weaker with the Japanese government now reportedly considering a second supplementary budget, with USD/JPY trading around mid-158 levels."

"Markets are unlikely to welcome this supplementary budget, given earlier guidance that it was no longer planned and that reserve funds will be used for disasters and other emergencies."

"Coupled with a planned consumption tax cut for food in April 2027 that will cost JPY5trn (~0.7% of GDP) per annum, JGB investors could worry about further increases in fiscal spending at a time of rising yields."

"BoJ should remain alert to any rise in inflation expectations and could thus adopt more hawkish guidance if the supplementary budget is perceived to be inflationary."

"Japan’s supplementary budget and OAT risks."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)