Rabobank [FX] JPY - supply and inflation

Before the bursting of Japan s asset bubble burst in 1990, the country s debt GDP ratio was positioned roughly in the middle of the range of all G7 nations (Figure 2). In the thirty years that followed, stagnating GDP combined with high levels of fiscal spending aimed at promoting growth elevated the debt GDP ratio to levels well above the G7 average. For years, Japan s heightened debt GDP ratio was spoken about in the FX market as a potential issue for future governments and taxpayers, but it was not an issue that was persistently front of mind for the FX market. The appointment of an expansionary PM last year appears to have changed that. That said, Takaichi s leadership followed the decision by the BoJ in 2024 to end its QEE programme. As we have argued on this page before, it is likely that it is this factor that has been largely responsible for drawing Japan s fiscal situation centre stage. We remain of the view that reassurances on Japan s fiscal situation combined with a hawkish BoJ are necessary requirements for any turnaround in the value of the JPY. Continue Reading