Japan issues warning on yen, bond yields as fiscal pressure mounts

TOKYO - Japanese policymakers said on Tuesday they stood ready to act decisively against excessive yen falls while remaining vigilant to rising bond yields that could hurt the economy, highlighting the dilemma they faced in countering unfavourable market moves.

Mounting prospects of a Bank of Japan rate hike next week, following hawkish signals from its governor, failed to reverse the yen's declines that boost import prices and households' cost of living.

"Our stance remains unchanged. We are always prepared to take decisive measures," Finance Minister Satsuki Katayama said in a news conference on Tuesday.

The renewed threat of intervention, however, failed to drive the yen away from the 160-per-dollar level seen as heightening the chance Tokyo will step in to prop up the currency. The yen weakened to as low as 160.295 per dollar on Tuesday.

Data showed Japanese authorities spent 11.7 trillion yen ($73 billion) intervening in foreign exchange markets, likely in several occasions from late April through early May, to support the yen. But the impact has proved limited with the yen having wiped out all gains made after the record amount of intervention.

Rising Japanese government bond (JGB) yields have also done little to halt the yen's declines. Mounting inflationary pressures from the Iran war has pushed up the benchmark 10-year JGB yield to 2.740% on Tuesday, putting it on track for its highest close since May 22.

"Rising interest rates affect the economy through various channels, so we will continue to scrutinise rate moves and their effect on the economy," Economic Revitalisation Minister Minoru Kiuchi told a news conference on Tuesday.

Kiuchi is seen as close to reflationist aides of Prime Minister Sanae Takaichi, who propose keeping fiscal and monetary policy loose to focus on propping up growth.

MORE FISCAL PRESSURE

Takaichi's administration has curbed fuel bills through subsidies and vowed to temporarily freeze an 8% levy on food sales - steps that strain Japan's already worsening finances.

An influential ruling party panel submitted to Kiuchi on Tuesday a list of proposals, which included a call to proceed with the food levy freeze and consider ramping up spending if needed to cushion the economic blow from the Iran war.

In times of crises, the government should avoid tax hikes and spending cuts even if doing so could delay achievement of Japan's fiscal target, the panel said.

The list also included reference on the need to scrutinise whether a law stipulating the BOJ's independence aligns with the government's focus on proactive fiscal policy.

Kiuchi said he hoped the BOJ works closely with the government to durably achieve its 2% inflation target, when asked at the press conference on prospects of a near-term interest rate hike.

The BOJ is expected to raise its policy rate to 1% from 0.75% at a two-day policy meeting ending on June 16 unless a sharp escalating in the Middle East conflict upends markets, sources have told Reuters.

Given jittery bond markets, the BOJ will also consider pausing a bond taper process next week in a move that would mark a turning point in its quantitative tightening plan.

($1 = 160.1400 yen)

(Reporting by Leika Kihara and Makiko Yamazaki; Editing by Tom Hogue, Shri Navaratnam and Lincoln Feast.)

Copyright Reuters or USA Today Network via Reuters Connect.

This story was originally published June 9, 2026 at 2:43 AM.