Yen resumes slide as Japan’s unfunded tax cut undercuts intervention gains

Days after a historic joint US-Japan currency intervention briefly pulled USD/JPY below 156, the yen has resumed its slide as markets digest a costly and unfunded fiscal package that analysts say works against the very goals the intervention was meant to achieve.

Cabinet Approves Tax Cut Amid Fiscal Concerns

Japan's cabinet on Wednesday approved Prime Minister Sanae Takaichi's plan to slash the consumption tax on food and non-alcoholic beverages to 1% from 8% for two years starting April 2027, marking the first reduction since the tax was introduced in 1989. The ruling Liberal Democratic Party's General Council unanimously rubber-stamped the measure earlier the same day, though members acknowledged lingering concerns over how the roughly ¥5 trillion annual revenue shortfall would be filled.theedgemarkets+2

In addition to the tax cut, the government plans to provide approximately ¥600 billion in annual cash transfers to low- and middle-income households, effectively reducing their food tax burden to zero. Takaichi has pledged not to rely on fresh debt issuance, but offered no specifics on alternative funding. Finance Minister Satsuki Katayama echoed the commitment to fiscal discipline without detailing a mechanism.fxstreet+3

One proposal floated this week by senior LDP lawmaker Daishiro Yamagiwa suggested tapping the Bank of Japan's ¥37 trillion in ETF holdings to cover the gap. "Stock prices are so high now that it won't hurt to think about speeding up the pace of sales," Yamagiwa said on an online program aired Tuesday, according to Reuters.reuters

Intervention Gains Fade

The fiscal announcement landed just days after the first coordinated US-Japan yen-buying intervention since 1998, confirmed on August 3 by both Finance Minister Katayama and US Treasury Secretary Scott Bessent. The operation pulled the dollar from near ¥164 — a 40-year high — down to below ¥156. Japan is estimated to have deployed upwards of $50 billion in the effort.cnbc+4

Yet by Thursday, the yen was drifting weaker again. Rabobank's Senior Macro Strategist Bas van Geffen noted that "these tax cuts do not lead to investments that could structurally improve Japan's economic growth — which could have lent JPY some of the necessary support".fxstreet

Analysts Call for Structural Follow-Through

BNY's Geoff Yu echoed the concern, writing Tuesday that "coordinated intervention has bought time but hasn't materially increased foreign JPY holdings." He stressed that durable yen demand requires "BoJ tightening, fiscal consolidation and structural reform" — none of which the tax cut delivers. Yu also noted that Treasury Secretary Bessent himself acknowledged intervention can give "market signals" but that Japan "is going to need policy follow-up".fxstreet

The real test, as Rabobank's van Geffen put it, "may be the currency". With the yen gradually depreciating again and the funding question unresolved, markets appear to be rendering their early verdict on whether intervention without fiscal credibility can hold.fxstreet