Yen Weakens on Yield Differential

The Japanese yen weakened to around 158.5 per dollar on Wednesday, approaching two-week lows as the wide yield gap between the US and Japan continued to favor the dollar. The currency remained under pressure from relatively low domestic interest rates and Japan’s heavy debt burden, with Prime Minister Sanae Takaichi pushing ahead with expansionary fiscal policies. In a parliamentary address, Takaichi pledged to cut the consumption tax on food products while emphasizing that the government would secure funding without issuing additional bonds, seeking to reassure financial markets. Meanwhile, data showed that Japan’s real wages rose 1.5% year-on-year in August, marking the eighth consecutive month of gains and reinforcing expectations for further Bank of Japan interest rate hikes. BOJ member Ayano Sato also expressed support for raising interest rates gradually in several stages.

The Japanese yen depreciated past 158 per dollar on Tuesday, but remained range-bound as Prime Minister Sanae Takaichi pushed forward with expansionary fiscal policies despite concerns over the weak currency and government funding. In her parliamentary address, Takaichi pledged to reduce the consumption tax on food products while stressing that the government would secure funding without issuing additional bonds, aiming to reassure financial markets. Meanwhile, investors awaited a series of economic reports due this week, including August data on wages, the current account and household spending, as well as September figures for consumer confidence and machine tool orders. Last week, a summary of opinions from the Bank of Japan’s September meeting showed growing concern about inflation exceeding the central bank’s 2% target, raising the possibility of another rate hike this year but providing little clarity on its timing ahead of policy meetings in October and December.

The Japanese yen was little changed around 157.8 per dollar on Monday, remaining in a sideways range for roughly two weeks now as traders awaited a series of economic reports due this week. Key releases include August wage, current account and household spending data, along with September figures for consumer confidence and machine tool orders. Last week, a summary of opinions from the Bank of Japan’s September meeting pointed to a growing focus on preventing inflation from rising above the central bank’s 2% target, signaling the possibility of another rate increase this year but offering little clarity on its timing ahead of policy decisions in October and December. Meanwhile, the yen remained under pressure from a strong dollar and elevated Treasury yields, even as weaker-than-expected US jobs data reduced pressure on the Federal Reserve to raise interest rates further.