Japan’s Takaichi to review policies, revenue and spending if rate shifts differ from expectations

Japanese Prime Minister Takaichi Sanae announced on Wednesday that the government plans to review policies, revenue, and spending if interest rate shifts deviate from expectations. Japanese Finance Minister Satsuki Katayama pledged to provide a comprehensive explanation of the budget compilation to the market. The USD/JPY pair, which was trading at 158.35, saw a 0.16% increase on the day.

The Japanese Yen (JPY) is a highly traded currency whose value is influenced by factors such as the Bank of Japan's policy, the yield differential between Japanese and US bonds, and the overall risk sentiment among traders. The Bank of Japan (BoJ) has historically played a significant role in currency control but typically exercises restraint due to political concerns about its key trading partners.

The BoJ's low-interest monetary policy from 2013 to 2024 contributed to the Yen's depreciation against major currencies due to a growing gap between the BoJ and other central banks. As the ultra-loose policy begins to unwind, the Yen has experienced some support. Over the past ten years, the BoJ's persistent low-interest stance has widened the gap between the yields of 10-year US and Japanese bonds, benefiting the US Dollar against the Yen.

In 2024, the BoJ's decision to gradually halt the ultra-loose policy, along with rate cuts in other major central banks, has narrowed this differential. The Japanese Yen is generally viewed as a safe-haven asset, meaning that in times of market turmoil, investors tend to favor the currency due to its perceived reliability and stability.