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Abstract：Japan’s currency is facing renewed selling pressure as Prime Minister Sanae Takaichi’s government unveils a record-breaking fiscal package, effectively neutralizing the market impact of the Bank of Japan’s (BOJ) historic pivot away from ultra-loose monetary policy.
Japan‘s currency is facing renewed selling pressure as Prime Minister Sanae Takaichi’s government unveils a record-breaking fiscal package, effectively neutralizing the market impact of the Bank of Japans (BOJ) historic pivot away from ultra-loose monetary policy.
Despite the BOJ raising rates by 25 basis points to 0.75%—a 30-year high—the Yen has weakened, with USD/JPY breaching 157. Traders are focusing on the fiscal deterioration implied by the new 122.3 trillion yen ($815 billion) budget for fiscal year 2026, creating a contradictory “fiscal expansion vs. monetary tightening” dynamic.
The budget, representing a 6.3% increase from the previous year, is driven by structural swelling in social security costs and a surge in defense spending to 8.8 trillion yen. While tax revenues are projected to hit a record high, they cover only a portion of expenditures, raising concerns about long-term debt sustainability in a nation where debt-to-GDP already exceeds 263%.
“Investors are no longer looking at the yield differential alone,” notes Rikiya Takebe, Senior Strategist at Okasan Securities. “The focus has shifted to fiscal credibility. The aggressive fiscal expansion is eroding trust in the Yen, particularly among overseas investors concerned about sustainability.”
The market response to the BOJ's December 19 hike was counterintuitive but telling. Instead of strengthening, the Yen fell, validating the view that a 75bps policy rate is insufficient to offset the inflationary pressure of massive government spending.
Government officials, including Finance Minister Satsuki Katayama, have issued verbal warnings about “speculative moves,” hinting at intervention. However, with the fundamental drivers of weakness now rooted in fiscal policy rather than just interest rate differentials, FX intervention may prove less effective than in previous cycles.
Disclaimer:
The views in this article only represent the author's personal views, and do not constitute investment advice on this platform. This platform does not guarantee the accuracy, completeness and timeliness of the information in the article, and will not be liable for any loss caused by the use of or reliance on the information in the article.
Currency markets opened the week with diverging narratives as the Japanese Yen (JPY) found footing on policy signals, while the Euro (EUR) struggles to price in the efficacy of German fiscal maneuvering amidst looming trade war threats.
The Bank of Japan (BOJ) has signaled a decisive shift away from its ultra-loose monetary past, with December meeting minutes revealing a policy board far more hawkish than market consensus anticipated. This development sets the stage for a high-stakes clash between monetary tightening and the government's massive fiscal expansion.
Despite the Bank of Japan’s (BOJ) attempts to normalize policy, the Japanese Yen faces a grim trajectory, with major institutions including JPMorgan and BNP Paribas forecasting a slide to 160 or lower against the Dollar by late 2026. The consensus is shifting from cyclical weakness to a narrative of "structural decline."
The Bank of Japan (BOJ) is facing a critical credibility test as bond markets signal that the central bank is dangerously behind the inflation curve.
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