The yen eased Tuesday but held most of last week's gains from joint Japan-U.S. Treasury intervention, with traders on alert for more action after a Monday surge pushed dollar/yen volumes to roughly $27 billion. Prime Minister Sanae Takaichi's push to cut Japan's food tax and fund a 370 trillion yen investment plan threatens to widen the budget gap as Tokyo's borrowing costs climb toward multi-decade highs.
The yen slipped 0.4% to 157.8 per dollar on Tuesday, giving back some of its gains after touching a three-month high of 155.20 in the previous session. The currency remains well above its 40-year low of 163.99 touched in July, holding onto most of the ground it recovered when Japan and the United States confirmed coordinated yen-buying intervention on Friday.
Traders brace for more Tokyo intervention
Monday's sudden surge in the yen stirred speculation that Japanese authorities had intervened again, though officials offered no confirmation. Trading volumes in dollar/yen hit roughly $27 billion in the early morning window that day, Citi analysts said, compared with recent averages of $1.9 billion.
MUFG senior currency analyst Lee Hardman said joint intervention can only buy time, adding that a sustainable reversal of the yen's five-year weakening trend would need a change in fundamentals, such as the gap between Japanese and U.S. interest rates. Two market sources told Reuters the U.S. Treasury bought yen for euros last week instead of selling dollars, an unusual move likely aimed at helping Japan without signaling Washington wants a weaker dollar. Against the euro, the yen slipped 0.5% to 181.62, down from Monday's almost nine-month high of 179.44.
Takaichi's food-tax cut adds to fiscal strain
Prime Minister Sanae Takaichi is pressing ahead with a plan to cut Japan's consumption tax on food to 1% from 8% for two years starting April 2027, a move that would cut an estimated 4.4 trillion yen in government revenue. The ruling Liberal Democratic Party advanced the bill through key committees on Tuesday, with Takaichi seeking cabinet approval this month and a parliamentary vote in autumn.
The cut piles onto a budget already squeezed by rising borrowing costs. Japan's 10-year government bond yield stood around 2.85% on Tuesday, close to multi-decade highs, while interest payments are projected to rise from 13 trillion yen in fiscal 2026 to 21.6 trillion yen in fiscal 2029 under the Finance Ministry's 3% nominal-growth scenario. The Bank of Japan's commitment to keep raising interest rates and pare its bond purchases is likely to push those costs higher still.
HSBC APAC rates strategist Justin Heng said Takaichi's blueprint has locked in an expansionary fiscal stance, noting the government has moved away from a primary-surplus budget target. "With limited clarity on funding channels, additional debt issuance remains a plausible outcome," Heng said, warning that long-end Japanese government bond yields are likely to stay elevated. Jesper Koll, expert director at Monex Group, said yields are rising because Takaichi's program is highly inflationary and markets fear the BOJ is behind the curve on inflation.
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