Japanese Yen Under Pressure as Fiscal Risks Revive ‘Takaichi Trades’ – DBS

Expectations for a new Japanese supplementary budget are reigniting so-called Takaichi trades, a dynamic that is pushing Japanese Government Bond yields higher and placing renewed downward pressure on the yen, according to DBS Group Research economist Ma Tieying.

What Are Takaichi Trades?

The term refers to market positioning linked to former Japanese Minister of Economy, Trade and Industry Sanae Takaichi, who has advocated for aggressive fiscal stimulus. When markets anticipate additional government spending—often funded by new bond issuance—investors adjust their portfolios accordingly. The typical trade involves selling Japanese government bonds (JGBs) in anticipation of higher supply, which drives yields up, and simultaneously selling the yen as the prospect of looser fiscal policy weakens the currency’s appeal.

Why the Revival Matters Now

Ma Tieying’s analysis comes as the Japanese government signals readiness to draft a fresh supplementary budget for the current fiscal year. This would follow a series of fiscal packages aimed at cushioning the economy from global headwinds and domestic inflation pressures. The expectation of increased JGB issuance has already been reflected in recent yield movements, with the benchmark 10-year JGB yield climbing toward levels not seen in over a decade.

For the yen, the implications are direct. A higher bond supply without corresponding demand from the Bank of Japan—which has been gradually reducing its market intervention—tends to push yields up and the currency down. The yen has already weakened significantly against the U.S. dollar this year, and renewed fiscal expansion risks accelerating that trend.

Broader Market Implications

The revival of Takaichi trades underscores a persistent tension in Japan’s macroeconomic policy mix. On one hand, the Bank of Japan is slowly normalizing monetary policy after years of ultra-loose settings. On the other, the government continues to rely on deficit spending to support growth. This divergence creates an environment where JGB yields rise, but the yen remains under pressure—an unusual combination that complicates hedging strategies for global investors.

For Japanese exporters, a weaker yen is generally positive, boosting the value of overseas earnings. However, for importers and households, the depreciation raises the cost of energy, food, and raw materials, adding to the cost-of-living pressures that have become a central political issue.

Conclusion

As Tokyo moves closer to another supplementary budget, the market’s focus on fiscal risks is likely to persist. DBS’s analysis highlights that the Takaichi trade framework remains relevant for understanding near-term yen and JGB dynamics. Investors should monitor budget announcements closely, as any deviation from expected issuance levels could trigger sharp adjustments in both bond and currency markets.

FAQs

Q1: What exactly is a Takaichi trade?
A Takaichi trade refers to a market strategy where investors sell Japanese government bonds and the yen in anticipation of increased fiscal spending and higher bond supply. The term is named after former METI minister Sanae Takaichi, a proponent of expansionary fiscal policy.

Q2: Why would a supplementary budget weaken the yen?
A supplementary budget typically requires issuing new government bonds. Higher bond supply can push yields up, but if the Bank of Japan does not fully absorb the issuance, the increased supply also reduces the yen’s relative value, especially against currencies like the U.S. dollar.

Q3: How does this affect ordinary Japanese consumers?
A weaker yen makes imported goods—such as energy, food, and raw materials—more expensive. While exporters benefit, households face higher living costs, which can dampen consumer spending and economic growth.