• Japan’s Prime Minister Takaichi plans tax cuts funded without new bond issuances to reassure financial markets.
• Bank of Japan considers rate hikes as inflation exceeds target, but timing remains unclear.
• Safe-haven US Dollar demand may pressure JPY following escalating Middle East geopolitical conflict.

USD/JPY moves little after posting minor gains in the previous day, trading around 157.90 during Asian hours on Tuesday. The currency pair has steadied into a tight trading range following recent developments in Japanese fiscal policy.

Japan’s Prime Minister, Sanae Takaichi, is pushing forward with expansionary economic measures despite persistent concerns surrounding the weak Yen and government debt. In a recent parliamentary address, Takaichi pledged to lower the consumption tax on food products while reassuring financial markets that the government intends to secure necessary funding without issuing additional bonds.

Meanwhile, uncertainty lingers regarding the Bank of Japan’s monetary trajectory. A summary of opinions from the central bank’s September meeting highlighted growing anxiety that inflation could outpace the 2% target, keeping the prospect of another rate hike this year firmly on the table. However, with policy meetings set for October and December, the central bank provided little clarity on the exact timing of any future rate adjustments.

Looking ahead, the US Dollar (USD) could gain ground against the Yen due to increased demand for safe-haven assets driven by escalating geopolitical tensions. Reports from Xinhua News Agency indicate that Yemen’s Houthi group claimed responsibility for coordinated drone and missile strikes targeting Saudi Arabian military bases, an oil facility, and major airports. According to Houthi spokesman Yahya Saree, a successful strike on King Khalid International Airport in Riyadh disrupted local air traffic, injecting fresh volatility into global financial markets.

HSBC highlights profit-led dynamics behind stubborn US inflation

Strategists at HSBC argue that US inflation, while widely blamed on “surging oil and computing costs, as well as the lingering impact of tariffs,” looks different when viewed through the lens of the gross value-added deflator. This measure, which captures “inflation generated by profits, wages, and non-labour related costs,” suggests that the latest acceleration in headline inflation “appears to have been driven mainly by stronger profit growth,” rather than purely by input cost pressures.