British Pound outpaces Japanese Yen as UK Budget and BoJ decision approach

GBP/JPY retains an upward bias, supported by the Japanese Yen’s weakness against its major peers.
With the BoJ expected to leave interest rates unchanged on Friday, attention is turning to the possibility of a December hike.
Wednesday’s UK Autumn Budget is in the spotlight before the BoE’s November monetary policy meeting.

Modest buying interest lifts GBP/JPY on Monday, with the Japanese Yen (JPY) lagging its major peers. The cross nevertheless remains largely within a trading range ahead of this week’s key events: the UK Budget and the Bank of Japan’s (BoJ) monetary policy announcement. At the time of writing, GBP/JPY is trading near 210.18, a gain of 0.19% for the day.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Further monetary tightening is supported by Japan’s latest inflation data, although the BoJ is widely expected to keep its policy rate unchanged at 1.25% when it announces its decision on Friday. Annual inflation excluding fresh food picked up to 2.1% in September from 1.7%. The measure stripping out both fresh food and energy increased to 2.4% from 1.9%.

With markets increasingly anticipating a December rate hike, attention will centre on comments from BoJ Governor Kazuo Ueda. In recent remarks, Ueda said that “underlying inflation is near the 2% target.” His warning was that “if the policy rate isn’t adjusted properly, market concerns about inflation risks could raise long-term rates.”

Expectations of additional tightening offer only limited support to the Japanese Yen (JPY), however, given Japan’s comparatively low interest rates and worries about its heavy debt burden. Energy-related inflation risks arising from the Middle East conflict are keeping other central banks hawkish. Against this backdrop, the BoJ’s gradual policy approach may do little to reduce the interest rate differential with other major economies.

For the British Pound (GBP), Wednesday’s UK Budget brings the government’s balancing act between economic support and fiscal discipline into focus. Traders will assess any tax and spending changes for their potential impact on the currency ahead of the Bank of England’s (BoE) November 5 policy decision. A 25-basis-point rate hike is fully priced in.

Ahead of the Autumn Budget, Deutsche Bank economists Sanjay Raja and Maui Brennan explain that their “baseline assumption was that the Chancellor would tap into the fiscal rule flexibilities, using financial transactions via public financial institutions (the so-called PuFins), to boost investment spending via a two-stage approach: a GBP 8bn expansion in the coming Autumn Budget, followed by an equal increase in the Spending Review due next year.”

That assessment now faces a more aggressive possibility. The economists highlight that “headlines from the FT over the weekend… suggest that Chancellor Healey will do more in the Autumn Budget, adding around GBP 20bn in investment over the next five years,” pointing to a substantially greater use of PuFins than they had previously envisaged.

Bank of Japan: Key Questions Answered

What role does the Bank of Japan play?

As Japan’s central bank, the Bank of Japan (BoJ) determines the country’s monetary policy. Its responsibilities include issuing banknotes and managing currency and monetary conditions to maintain price stability, defined by an inflation target of around 2%.

How has the Bank of Japan’s policy evolved?

Against a backdrop of low inflation, the Bank of Japan adopted an ultra-loose monetary policy in 2013 to support economic activity and lift prices. Quantitative and Qualitative Easing (QQE) forms the basis of this policy: the bank prints money to purchase assets, including government and corporate bonds, thereby supplying liquidity. The strategy was intensified in 2016, when the bank eased policy further, first through negative interest rates and subsequently by directly managing the yield on its 10-year government bonds. A rate increase in March 2024 marked the BoJ’s effective retreat from its ultra-loose stance.

How does Bank of Japan policy affect the Japanese Yen?

The Yen weakened against its major currency peers as a result of the Bank’s substantial stimulus. The depreciation intensified in 2022 and 2023 as the policy paths of the Bank of Japan and other leading central banks moved further apart. Those central banks raised interest rates sharply to combat inflation at levels not seen in decades. By widening interest rate differentials with other currencies, the BoJ’s policy weighed on the Yen’s value. A partial reversal followed in 2024, when the BoJ chose to move away from its ultra-loose policy stance.

What prompted the Bank of Japan to begin withdrawing its ultra-loose policy?

Japanese inflation climbed above the BoJ’s 2% target as a weaker Yen combined with a surge in global energy prices. Expectations of higher domestic salaries, a key driver of inflation, also helped prompt the policy shift.