Japan eyes $19b extra budget as costs rise with Iran war

Japanese Prime Minister Sanae Takaichi said on Monday the government will compile a $19 billion supplementary budget to support households grappling with soaring everyday costs driven by the Iran war.

Takaichi said the budget, which is about 3 trillion yen, will be used to ease the rising cost of petrol, electricity and gas, explaining that “the situation in the Middle East remains uncertain”.

“With a view to minimising risk, we have drawn up a supplementary budget to ensure we’re fully prepared financially,” she told reporters, adding the draft would be submitted to parliament possibly next week.

Early this month, leading potato chip maker Calbee unveiled a new grey packaging for 14 product lines, swapping its signature orange-and-yellow packets, with local media attributing the move to an ink shortage linked to the Iran war.

But Takaichi said the government expected to be able to secure a stable supply of oil until next spring.

She added that alternative supplies for naphtha, an oil byproduct used in a wide range of industries, from outside the Middle East have recovered to more than 80 per cent of previous levels.

Japan’ central bank hiked its inflation forecasts last month and cut its growth projections after the Iran war sent oil prices soaring.

It said “the rise in crude oil prices is expected to push up prices, mainly of energy and goods, with moves to pass on wage increases to selling prices continuing”.

Meanwhile, Eurozone government bond yields fell to their lowest levels in about a month on Monday as renewed hopes of a US-Iran deal to reopen the Strait ‌of Hormuz eased concerns over inflation and reduced expectations of aggressive central bank policy tightening. Borrowing costs ​tracked moves in oil prices, which slid 6% amid optimism over a resolution ‌of the conflict, even as ‌key sticking points remained unresolved.

This was despite Iran and the United States playing down hopes for an imminent breakthrough in efforts to end their war.

Money markets priced in a European Central ‌Bank depo rate at 2.56% in December from 2.67% late Friday, from the current 2%. They indicated a 70% chance of a first rise next month from 80%.

“It is unclear whether by mid-June there will be enough clarity and certainty around any potential deal to call off a (ECB) rate hike,” said Benjamin Schroeder, senior rate strategist at ING.

“There is good reason for caution around the need for further tightening,” he argued.

ING’s Schroeder noted Europe would benefit the ​most from a swift resolution to the disruption in the Strait of Hormuz, adding ‌that the region’s broader macroeconomic environment remains fragile. Germany’s 2-year yields, more sensitive to expectations for policy rates, fell 10 basis points (bps) to 2.54%, their lowest since May 7. They reached 2.771% in late March, the highest since July 2024. ECB policymaker Yiannis Stournaras said on Monday that if Eurozone inflation overshoots the target temporarily but significantly, there should be a cautious adjustment of monetary policy in a ​more restrictive ‌direction.

“The second-order effect of oil and inflation is showing up in sovereign bond markets,” ‌Bob Savage, head of markets macro strategy at BNY, said.

“The question for investors is what drives bond yields beyond oil, with focus on central bank policy, fiscal sustainability and whether growth can support the ‌debt load,” he added, ‌after recalling the recent rise in long-dated government bond yields globally. Germany’s 10-year government bond yield, the euro area’s benchmark, was ‌down 9 bps at 2.9831%, its lowest since April 8. It reached 3.13% in late March, its highest level since June 2011. Italy’s 10-year government bond yield fell 6.5 bps to 3.657%, its lowest since April 17. The yield gap of ​Italian government bonds versus Bunds was at 71 bps. It was at 63 bps before the attack on Iran and hit 103.62 in late March, the highest level since June 2025.

Copper prices rose on Monday as the dollar and oil fell on hopes of a potential peace deal between the United ‌States and Iran, easing fears of inflation and a global economic slowdown.

Three-month copper ​on the London Metal Exchange rose 0.90% to $13,635 a metric ton ‌by 0845 GMT.

The most-traded copper ‌contract on the Shanghai Futures Exchange gained 1.1% to 105,650 yuan ($15,548.76) a ton.

“We are getting some positive news on the conflict side. So that’s supporting the ‌market sentiment for industrial metals,” said ANZ analyst Soni Kumari.

Agencies