USD/JPY: Japan mulls more bond issuance to fund extra budget – BBH

Long-term JGB yields remain steady near recent lows. Japan's Finance Minister Katayama signaled the government may have to issue more bonds to fund the upcoming extra budget noting 'it can’t be helped if it comes to that.' Earlier this week, Prime Minister Takaichi ordered a fresh package of economic measures that is likely to exceed last year's ¥13.9 trillion (2.2% of GDP) supplementary budget to help households tackle inflation, BBH FX analysts report.

BOJ likely to stay hawkish as inflation stays above target

"Japan September CPI was mixed and October PMI weak. Both headline and core ex. fresh food CPI matched consensus at 2.9% y/y vs. 2.7% in August. However, core ex. fresh food & energy was 0.1pts lower than expected at 3.0% y/y vs. 3.3% in August. Meanwhile, Japan private sector growth momentum slowed as the flash composite PMI fell to a five-month low at 50.9 vs. 51.3 in September. The details showed the manufacturing PMI dipped 0.2pts to a 19-month low at 48.3 and the services PMI slumped 0.9pts to a four-month low at 52.4."

"We still anticipate the BOJ to resume normalizing rates next week or at the very least deliver a hawkish hold which can lift the beleaguered JPY. Fiscal support is set to be ramped up and the Tankan points to an ongoing recovery in real GDP growth. Additionally, core inflation remains well above the BOJ’s 2% target and is tracking above the bank’s projections. In July, the BOJ projected core ex. fresh food and core ex. fresh food & energy CPI to average 2.7% and 2.8% in 2025, respectively."

"Japan’s swaps market price-in just 12% odds of a 25bps rate hike to 0.75% at the October 30 meeting and nearly 45% probability of a hike by December. A full 25bps rate increase is priced-in over Q1 2026."