Will the Yen Remain Weak Beyond 2026? Podcast Audio Commentary

The fact that the national budget for fiscal year 2026 has reached a record high of 122 trillion yen, with debt servicing costs ballooning to 31 trillion yen, is likely to be a major factor supporting a weaker yen.

• Declining Fiscal Credibility and Yen-Selling Pressure
  With Japan's general account budget reaching its largest scale ever, skeptical views regarding Japan's fiscal reconstruction are strengthening in the market. Because the expansion of the fiscal deficit undermines the value of the yen as a currency, it is expected that the yen will remain prone to selling in the medium to long term. Some market participants are even anticipating a scenario where the exchange rate reaches the 160 yen per dollar range.
  

• Vulnerability to Rising Interest Rates and Constraints on the Bank of Japan
  The fact that debt servicing costs for interest payments and redemption of government bonds have reached 31 trillion yen shows that Japan's fiscal position is extremely vulnerable to rising interest rates. Even if the Bank of Japan tries to raise interest rates to curb the yen's depreciation, there is a view that significant rate hikes are difficult because the increased burden of interest payments would put pressure on public finances. This prediction that the Bank of Japan cannot act flexibly, as a result, becomes a factor that leaves the yen's depreciation unchecked.

• Vigilance Against Loosening Fiscal Discipline
  This budget proposal is unusual in that the budgetary requests from each ministry were reflected with almost no cuts, mirroring the administration's policy of prioritizing active fiscal spending. This shift from the previous path of fiscal reconstruction is being perceived by the market as a loosening of discipline and is being recognized as a factor for selling the yen.
  

• Balance Between Growth Investment and Debt Burden
  The budget proposal includes massive support for the semiconductor and AI sectors, and while there are expectations for future growth, the negative aspect of short-term debt increases is currently being prioritized and viewed with caution. Until these investments lead to economic growth and increased tax revenue, the pressure to push down the value of the yen is expected to remain dominant.
  
  Summary
  For the 2026 yen exchange rate, it is highly likely that a trend where the yen struggles to appreciate will continue, as these structural fiscal problems and the limitations of the Bank of Japan's policies are being recognized. While future U.S. economic trends and the specific timing of interest rate hikes are also important, the structure remains one where downward pressure on the yen from the fiscal side persists.