Pound Sterling gains against Japanese Yen ahead of BoJ decision

• GBP/JPY retains small gains, supported by continued weakness in the Japanese Yen.
• Markets show little response to the UK Autumn Budget as traders anticipate a November BoE rate hike.
• Friday’s Tokyo inflation release and BoJ interest rate decision remain in focus for traders.

Modest gains in GBP/JPY on Thursday reflect the Japanese Yen’s (JPY) weakness against most major currencies. The cross is trading near 210.64 at the time of writing, a rise of 0.15% for the day. With investors weighing the UK Autumn Budget, attention is also turning to Friday’s monetary policy announcement from the Bank of Japan (BoJ).

Wednesday saw UK Chancellor John Healey unveil his first Budget while adhering to the government’s fiscal rules. Among the main measures are higher taxes on banks, savers and landlords, £100 in energy support for eligible households and an extension of the fuel duty cut. Fiscal headroom for 2029-30 stands at £15 billion.

Why is the UK Budget viewed as neutral for the Pound and gilts despite greater fiscal drag?

For Brown Brothers Harriman strategists, the UK October 2026 Budget “is neutral for GBP and gilts,” as the government’s decision to tighten fiscal policy is accompanied by slightly higher planned debt issuance. They note that “the government modestly increased fiscal tightening” but also “plans to issue slightly more debt.” Their assessment highlights that the “cyclically adjusted primary balance, which excludes interest costs and adjusts for the economic cycle, is projected to improve from a deficit of -0.3% of GDP in 2026/27 to a surplus of +0.5% in 2027/28.”

BBH nevertheless warns that “the additional fiscal restraint is probably too modest to materially curb the nearly 125bps of BoE rate hikes implied over the next twelve months.” The projected shift represents “a fiscal drag of 0.8% of GDP, up from 0.6% projected in March,” according to the strategists.

A 25 bps increase is fully priced in by traders ahead of the BoE’s interest rate announcement on November 5. Rates have remained on hold so far this year, with policymakers finding little evidence that higher energy costs were feeding through to broader prices and wages. The argument for a November hike has, however, gained strength from the latest inflation increase and steady labour market and growth data.

In Japan, expectations point to unchanged interest rates at Friday’s Bank of Japan (BoJ) meeting, following a total of 50 basis points (bps) of tightening earlier this year. With traders looking for a further hike in December, close attention will be paid to the BoJ’s revised growth and inflation projections and Governor Kazuo Ueda’s press conference.

Before the policy announcement, fresh indications of price pressures and labour market conditions will come from Tokyo’s October inflation readings and September unemployment figures.