Rabobank’s Senior Macro Strategist Bas van Geffen discusses renewed Japanese Yen (JPY) weakness following recent joint US-Japan FX intervention that briefly pushed USD/JPY below 156. He highlights Japan’s planned food sales tax cut and household handouts, noting funding uncertainties and criticism from markets and politicians. He stresses that these measures do not structurally improve Japan’s growth, leaving the Yen lacking durable support.
Fiscal plans and FX intervention
“Days after the Japanese Ministry of Finance –and the US Treasury– intervened in FX markets to prop up the yen, the cabinet approved a plan to cut the sales tax on food for two years. On top of that, the government is planning handouts to lower-income households. High costs of living are weighing on PM Takaichi’s popularity.”
“The tax cut costs JPY 4 trillion (around 0.6% of GDP) in lost revenues annually, and the government did not specify how it would fund this shortfall. The prime minister tried to reassure investors that the measures are temporary, and Finance Minister Katayama pledged to refrain from financing this tax cut through Japan’s deficit.”
“The unfunded tax plan has drawn criticism from both the opposition and people within the ruling LDP, as well as market participants – although today’s 30-year bond auction showed little sign of concern or investor fatigue. Having said that, the real litmus test may be the currency.”
“Over the past couple of days, the yen has been gradually depreciating again after the joint US-Japan intervention briefly pushed USD/JPY below 156 on Friday. The FX market is probably watching for signs of new interventions, or signs of more structural support for the currency.”
“Yet, these tax cuts do not lead to investments that could structurally improve Japan’s economic growth – which could have lent JPY some of the necessary support. But, paradoxically, the cost of effective growth-enhancing policies would probably eclipse the budgetary implications of Takaichi’s food tax cuts.”
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)