DBS Group Research economist Ma Tieying highlights that expectations for a new Japanese supplementary budget are reviving so‑called Takaichi trades, with higher anticipated bond supply pushing Japanese Government Bond yields up and weighing on the Yen. USD/JPY is again approaching 160, underscoring only temporary support from earlier intervention. DBS maintains its BoJ call.

Fiscal package prospects pressure Japanese Yen

"Expectations of a supplementary budget are reviving momentum in “Takaichi trades”. In response to the potential economic impact of the Middle East conflict, Prime Minister Sanae Takaichi signalled on Monday that she has instructed the Finance Ministry to begin drafting an additional budget, reversing her earlier view that existing reserve funds would be sufficient."

"Market discussions suggest a fiscal package in the range of JPY 3tn-10tn, partially financed through additional government bond issuance. Spending is expected to prioritise gasoline and electricity subsidies, alongside broader inflation relief measures for households and SMEs."

"Reflecting higher expected bond supply, JGB yields have moved higher, with the 10Y yield exceeding 2.5% and the 30Y yield above 4.0%. The rise in long-end yields, together with an elevated fiscal risk premium, has also weighed on the yen."

"USD/JPY has again risen toward the 160 level, highlighting only temporary effects from Finance Ministry intervention in late April and early May."

"With inflation staying relatively contained, the Bank of Japan may not be in a hurry to hike rates at its June meeting. We maintain our view that the BoJ will next hike rates to 1.00% at the July policy meeting."

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