MUFG’s Lee Hardman notes that the US Dollar’s (USD) renewed strength and higher US yields have helped USD/JPY trade back above 159.00 overnight, with the pair moving closer to 160.00. He highlights that rising United States (US) Treasury yields, global bond sell-offs, and Japan’s planned supplementary budget and fresh debt issuance reinforce JGB weakness and add to downside risks for the Japanese Yen (JPY).

Supplementary budget amplifies JGB and JPY selloff

"The US dollar has continued to trade on a stronger footing at the start of this week which has helped to lift USD/JPY back above the 159.00-level overnight."

"US rate market participants are moving to price in a higher probability of multiple Fed rate hikes in response to the energy price shock."

"At the same time, the sell-off in JGBs and the yen has been encouraged as well overnight by reports that Prime Minister Takaichi has called on the Ministry of Finance to compile an extra budget which is likely to require fresh debt issuance."

"The planned supplementary budget is expected to fund emergency relief measures rather than provide economic stimulus, and the government is likely to issue fresh debt according to an unnamed government official cited by Reuters."

"Fundamental factors continue to favour further yen weakness and will keep pressure on Japan to intervene again to support the yen as the USD/JPY moves back closer to the 160.00-level."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)