Japanese Yen outperforms as British Pound loses ground

• Against the Japanese Yen, the British Pound drops sharply towards 210.30.
• At its policy meeting later this month, the BoJ is expected to keep interest rates on hold.
• Strong UK CPI figures fuel expectations of a BoE interest rate rise.

With the Bank of Japan (BoJ) expected to hold interest rates at 1.25% next week, the Japanese Yen (JPY) nevertheless outperforms, putting pressure on the British Pound (GBP). Sterling trades around 210.30 against the Yen in Thursday’s European session, down 0.5%.

Every economist in the latest Bloomberg survey favoured keeping BoJ interest rates on hold at the 30 October policy meeting. For December, however, 83% expect the Japanese central bank to increase its 1.25% policy rate, compared with 35% in last month’s survey.

Recent comments by BoJ Governor Kazuo Ueda have further supported expectations that monetary policy remains on a tightening course.

BoJ’s Ueda signals a mildly hawkish stance as inflation approaches target

Although FXS Speechtracker places this speech slightly below Governor Ueda’s historical average, its emphasis on “underlying inflation near 2%” and a “positive loop” between wages and prices suggests a mildly more hawkish stance than earlier communications. By highlighting the need to anchor core inflation near 2%, while acknowledging resilient global demand, tight labour markets and demand-driven price pressures, Ueda strengthens the view that the BoJ is approaching the conditions needed for further policy normalisation.

That hawkish message is moderated by a cautious, data-dependent approach: the fundamental plan for tapering bond purchases remains unchanged, and emergency bond measures will not be announced in advance. For the YEN and JGBs, this indicates that financial conditions will stay accommodative for the time being, although an incorrectly calibrated policy rate could push long-term yields higher. Credible progress towards the 2% inflation target is therefore being used to support a gradual, controlled move towards higher interest rates and a more stable JGB market.

A warning against altering the current monetary policy course also came from BoJ Deputy Governor Ryozo Himino on Wednesday.

Yen outlook strengthens as Himino highlights AI-driven inflation risks

While BoJ’s Himino matches the 8.2 FXS Speechtracker baseline, his focus on increasing medium- and long-term inflation expectations and upside price risks gives his remarks a distinctly hawkish slant. The case for earlier normalisation rests on his references to strong AI-related capital expenditure and exports, underlying inflation approaching the 2% target, and the risk of economic damage from delaying policy adjustments. Together, these points support a stronger Yen and higher Japanese yields.

With financial conditions still accommodative, real interest rates low and bank lending growing rapidly, Himino’s assessment strengthens the argument that policy may be too loose given the heightened price risks. His call for appropriate monetary policy to deliver stable prices and sustainable growth suggests a greater willingness at the BoJ to tighten should inflation remain at or above target. This should leave Yen bears wary while supporting a gradual reassessment of the BoJ’s policy path.

In the United Kingdom (UK), meanwhile, strong September Consumer Price Index (CPI) figures published on Wednesday have increased the likelihood of the Bank of England (BoE) raising interest rates at its November policy meeting.

BoE November rate rise expectations strengthen after UK inflation surprise

September’s UK CPI reading exceeded forecasts, Deutsche Bank analysts note, saying it "rose more than expected to +3.5% in September (vs. +3.4% expected)." They describe this as "the highest level for headline CPI in nearly a year," adding that "the core CPI print also hit a 6-month high of +2.8%, although that was in line with expectations." In the bank’s assessment, stronger inflation, together with the earlier robust labour market data, "helped to cement investor expectations for a BoE rate hike in November," leaving markets increasingly confident that policymakers will act at the next meeting.