Concerns of excessive fiscal spending under PM Takaichi should be gradually reined in, negating a key drag for the JPY since late last year. Japan’s draft FY26 budget is likely to yield the first primary surplus since 1998, and Takaichi has notably described her fiscal policy stance as “responsible and proactive” in a speech at the Keidanren last month. To be sure, fiscal worries have not completely dissipated. There remain concerns of a possible shift away from a primary balance target after a policy review later this year, as Takaichi had described this to be a constraint for growth investment during her LDP election campaign. Nevertheless, her fiscal policy adaptability in response to rising long-term JGB yields should be sufficient to ward off bearish JPY sentiment. USD/JPY should stabilize around the 155 level, with an easing likely once the USD softens.
USD volatility could be picking up as Treasury Secretary Bessent said overnight that Trump could decide on his Fed chair nominee this month, with Hassett, Warsh, Waller, and Blackrock’s Rieder in the running. Markets will weigh the risks of Powell’s successor acceding to pressure from the administration to cut rates, which we think is a development that will hurt US policy credibility and weigh on the USD. Bessent has also echoed Trump’s view for rate cuts, saying that he sees interest rates as substantially above the neutral rate, and that policy should not be in “restrictionary” mode. Ahead of Dec non-farm payrolls today, the DXY has firmed towards 99 on expectations of a better labour market outturn. Analysts are expecting a 70k gain in NFP and a dip in the unemployment rate to 4.5%.
Quote of the Day
“Measure what is measurable and make measurable what is not so.”
Galileo Galilei
January 9 in history
Gabriel Attal became France’s youngest (caretaker) prime minister at 34 in 2024.
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