Japan’s Record Budget Sparks Yen Concerns Despite Strong Economic Signals

The Japanese yen weakened in Wednesday’s trading, with the dollar/yen pair rising by around 0.7%, as renewed concerns over Japan’s fiscal policy overshadowed recent positive momentum in the currency and put fresh pressure on its performance.

The decline followed reports that the Japanese government is considering a record budget exceeding 120 trillion yen for the 2026 fiscal year, raising market fears about widening fiscal deficits and their potential negative impact on the yen.

On the positive side, the yen found some support from encouraging economic data released earlier in the day. Japan’s exports in November grew more than expected, while core machinery orders in October posted their strongest increase in seven months, pointing to improving industrial activity and business investment.

Rising Japanese government bond yields also provided relative support to the currency. The yield on the 10-year bond climbed to its highest level in 18 years, helping to narrow interest rate differentials in favor of the yen and partially offset its losses.

Additional backing came from growing expectations that the Bank of Japan will raise interest rates by 25 basis points at its policy meeting scheduled for Friday. Markets are pricing in an almost certain probability of such a move, reinforcing the view that monetary tightening could help stabilize the yen in the near term.

Overall, while recent economic indicators and monetary policy expectations offer support, concerns over Japan’s expanding fiscal outlook remain a key factor weighing on the yen’s trajectory.