The Japanese yen weakened to around 159.5 per dollar on Tuesday, reversing the previous session’s gains amid mounting fiscal concerns and persistent inflationary pressures. Market anxiety intensified after the Takaichi administration proposed cutting the consumption tax on food to 1% for two years, without specifying a replacement revenue source. The measure is widely viewed as an inadequate response to inflation that is unlikely to secure lasting price stability.
Investors also remained wary of elevated energy prices, which continue to weigh on Japan’s oil-dependent economy and its currency. At the same time, the yen stayed under pressure from wide interest rate differentials: the recent rise in Japanese government bond yields has been largely offset by a comparable increase in US Treasury yields.
Against this backdrop, traders are increasingly betting on a Bank of Japan interest rate hike in September, in hopes that tighter policy will support the yen and help contain inflation.
