The yen is approaching the psychologically significant 160 level, and the market is watching the Bank of Japan governor's speech this afternoon.

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The yen is testing a subtle boundary—160.

On the morning of June 3 in Asia, the yen-dollar exchange rate fell close to the 160 mark, reaching its lowest level since Japanese authorities intervened in the forex market at the end of April.

According to Bloomberg, traders are generally reluctant to push the yen past the key psychological level of 160; the risk of intervention is the most immediate concern. Meanwhile, the governor of the Bank of Japan will deliver a speech this afternoon, and the market is waiting for his comments on exchange rates and monetary policy direction.

On the same day as the exchange rate came under pressure, the Japanese cabinet approved a supplementary budget of about 2.8 trillion yen (around $19 billion) to deal with inflation shocks brought on by ongoing turmoil in the Middle East. The combination of these two events has simultaneously tightened three lines: the yen’s trend, fiscal path, and monetary policy.

160: A Line Traders Dare Not Easily Cross

In early Wednesday trading, the yen once dropped close to 160 but never broke through.

The special nature of this position lies in this: at the end of April this year, when the yen last approached this level, the Japanese authorities immediately intervened in the market and pulled the exchange rate back. This memory has created a conditioned reflex in the market—the closer to 160, the higher the risk of intervention, and the greater the cost of shorting the yen.

To use a simple analogy: 160 is like an electrified fence—traders know it's there, so they don't dare touch it easily.

Currently, the market’s focus is on the Bank of Japan governor's speech this afternoon. If his tone is hawkish and hints that the pace of rate hikes could accelerate, the yen may receive support; conversely, if his attitude is vague, the yen may come under renewed pressure, and the test of 160 will be even more direct.

$19 Billion Supplementary Budget: Where the Money Comes From, Where It Goes

On Tuesday, Prime Minister Sanae Takaiti’s cabinet approved this supplementary budget, with the core being the creation of a new 2.5 trillion yen reserve fund dedicated to subsidies for commodity prices pushed up by the Middle East situation. The government has not yet announced the specific uses of the fund, but it is expected to initially be used to lower gasoline prices.

Japan is a resource-poor country, highly reliant on Middle East imports for crude oil, not only as fuel but also as raw material for plastics and other industrial products. Continued turmoil in the Middle East directly raises Japan’s import costs and domestic inflation.

Before this, the government had already used about 510 billion yen of reserves from this fiscal year’s budget to subsidize household electricity and gas bills until September. This supplementary budget will add to this funding pool, bringing available resources up to 1 trillion yen.

The supplementary budget will be submitted to parliament on Wednesday and could pass as soon as Friday.

Fiscal Concerns: The Bond Market Is Sending Signals

This money requires new borrowing. According to Bloomberg, Japan’s total government bond issuance this fiscal year will increase by about 3.1 trillion yen, reaching about 183.8 trillion yen. The government says that due to the cancellation of some debt authorized but unused in the previous year’s budget, the market issuance on a calendar year basis will remain at 168.5 trillion yen.

But the bond market’s reaction has already exposed the issue. Last month, Japanese government bonds were hit by a large sell-off; the 10-year yield touched a 30-year high, while ultra-long bond yields set records. The driving forces behind this are inflation, fiscal policy direction, and gradual rate hikes by the Bank of Japan.

More notable is the timing: this supplementary budget was submitted roughly one month after parliament had just passed the annual budget, which is uncommon in Japan. Investors are closely watching Prime Minister Sanae Takaiti’s fiscal management capability; such swift additional spending may further intensify market concerns about Japan’s fiscal trajectory.

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