Rabobank's Senior Macro Strategist Bas van Geffen highlights renewed weakness in the Japanese Yen (JPY) following a recent joint intervention by the Japanese Ministry of Finance and the US Treasury, which briefly pushed the USD/JPY exchange rate below 156 on Friday [1]. Despite this intervention, the Yen has gradually depreciated again over the past couple of days, indicating limited lasting impact from the FX action [1].
In response to high living costs and declining popularity for Prime Minister Takaichi, the Japanese cabinet approved a plan to cut the sales tax on food for two years and is planning handouts to lower-income households [1]. The annual cost of the tax cut is JPY 4 trillion, approximately 0.6% of GDP, but the government has not specified how it will fund this revenue shortfall [1]. Finance Minister Katayama pledged not to finance the tax cut through Japan’s deficit, and the prime minister reassured investors that the measures are temporary [1].
The unfunded nature of the tax plan has drawn criticism from opposition parties, members of the ruling LDP, and market participants. However, the latest 30-year bond auction showed little sign of concern or investor fatigue, suggesting that bond investors are not yet alarmed by the fiscal measures [1]. The FX market, however, remains vigilant for signs of further intervention or more structural support for the currency [1].
Van Geffen argues that the current tax cuts and handouts do not lead to investments that could structurally improve Japan’s economic growth, which is necessary for durable support for the Yen. He notes that effective growth-enhancing policies would likely have even greater budgetary implications than the current food tax cuts [1].
CONCLUSION
Despite temporary fiscal measures and a joint FX intervention, the Japanese Yen continues to weaken, reflecting skepticism about the effectiveness and sustainability of Japan's policy response. Market participants remain focused on potential further interventions and the need for structural reforms to support the currency. The lack of durable growth measures and funding clarity for the tax cuts leaves the Yen vulnerable in the near term.