Expectations of a new Japanese supplementary budget have increased after Prime Minister Sanae Takaichi instructed the Finance Ministry to start drafting one, reversing her earlier view that reserve funds were enough. The package is discussed at around JPY 3tn–10tn, with part funded by extra government bond issuance.
Planned spending is expected to focus on petrol and electricity subsidies, plus wider inflation relief for households and SMEs. Anticipation of higher bond supply has pushed Japanese Government Bond yields higher, with the 10-year yield above 2.5% and the 30-year yield above 4.0%.
Supplementary Budget And Market Impact
The yen has weakened as long-dated yields rose and a higher fiscal risk premium developed. USD/JPY has moved back towards 160, following Finance Ministry intervention in late April and early May.
With inflation described as relatively contained, a Bank of Japan rate rise is seen as less likely at the June meeting. A next rate increase to 1.00% is expected at the July policy meeting.
We are again seeing talk of a new supplementary budget reviving what are known as “Takaichi trades.” This is creating expectations of increased Japanese Government Bond (JGB) issuance to fund new spending. The prospect of more government debt is putting downward pressure on the yen.
This added bond supply is pushing JGB yields higher, with the 10-year yield recently climbing above 1.1%, a level not seen in over a decade. A rising fiscal risk premium is weighing on the yen, as the market is concerned about the country’s debt load. This is happening even as higher yields would normally attract investment.
Trading Implications And Key Risks
As a result, the USD/JPY exchange rate is approaching the 160 mark again, a critical psychological level. We saw this pattern last year and in 2024, where official intervention only provided temporary relief for the yen. Current market action suggests those interventions have, once again, failed to reverse the underlying trend.
For derivative traders, this environment of a steady upward trend combined with sharp, unpredictable intervention risk makes long option strategies attractive. We believe buying USD/JPY call options offers a defined-risk way to profit from further yen weakness. This strategy captures upside potential toward 165 while capping losses should the Ministry of Finance intervene heavily.
The Bank of Japan is not expected to help the situation at its upcoming June meeting. With Japan’s core inflation holding steady around 2.5% year-over-year, the central bank has little urgency to hike interest rates aggressively. The wide interest rate differential with the United States, where rates are substantially higher, remains the dominant force driving the yen weaker.
We also see an opportunity in betting on a steeper Japanese yield curve. The government is likely to issue long-dated bonds to finance its budget, which should push 20- and 30-year yields up faster than short-term rates. Traders can use interest rate swaps or futures to position for this gap to widen in the coming weeks.
The main risk to these views would be a surprise shift in tone from the Bank of Japan. Any signal of a faster pace of rate hikes than currently priced in could cause a sharp, sudden strengthening of the yen. Traders must also remain alert for larger-than-expected direct intervention in the currency market.
