Japan\u2019s Prime Minister Sanae Takaichi said a planned package to cap household electricity and gas bills from July to September would be funded via an extra budget of more than \u00a53tn, including subsidies costing about \u00a5500bn. She said the government will approve the electricity and gas subsidy on Tuesday and issue new deficit-financing bonds to cover the additional spending, while keeping bond issuance unchanged on a calendar basis. Any new debt, she argued, would be offset by higher tax and other revenues, limiting any effect on the bond market, and she reiterated an aim to reduce the debt-to-GDP ratio.<\/p>\n
Takaichi also said Japan could secure oil supplies until next spring and would seek to avoid market disruptions associated with the oil-shock era. Energy policy targets include lifting the share of nuclear and renewable power to as much as 70% from 30%, alongside renewed calls for seasonal energy saving; minister Akazawa is due to set out details tomorrow. The yen showed no immediate reaction; USD\/JPY was last 0.2% higher near 159.00.<\/p>\n
We see the government planning to issue more debt to fund energy subsidies for households this summer. They are trying to reassure markets by promising to offset this with higher tax revenue. Still, this adds a complex element to the Bank of Japan’s slow move away from its easy money policy.<\/p>\n
The key driver remains the wide interest rate gap between Japan and the United States. With the US 10-year Treasury yield hovering around 4.5% while Japan’s is barely above 1.1%, there is a significant incentive to sell the yen for dollars. We believe this powerful “carry trade” will continue to pressure the yen in the coming weeks.<\/p>\n
Given the risk of sudden Bank of Japan intervention, especially as the currency pair nears the 160 level where officials previously acted in 2024, we are cautious about simply selling the yen outright. We prefer using derivatives, specifically buying US dollar call options against the yen, to position for further weakness. This strategy allows us to profit if USD\/JPY pushes past 160 but limits our potential losses if the authorities decide to support their currency.<\/p>\n
The pledge to reduce the debt-to-GDP ratio seems difficult to achieve while also issuing new bonds for subsidies. Japan’s debt-to-GDP ratio remains the highest among developed nations, last recorded at over 261%, making promises of fiscal discipline less credible to us. We will be watching the upcoming extra budget details very closely for any signs of further un-funded spending.<\/p>\n","protected":false},"excerpt":{"rendered":"
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