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

• GBP/JPY edges higher as the Japanese yen lags its major counterparts.
• A Friday rate hold is expected from the BoJ as attention turns to the prospect of a December increase.
• Wednesday’s UK Autumn Budget takes centre stage before the BoE’s November monetary policy meeting.

At around 210.18 at the time of writing, GBP/JPY is 0.19% higher on Monday, with the Japanese yen (JPY) trailing its major counterparts. The gains are modest, however, and trading remains largely confined to a range ahead of this week’s key events: the UK Budget and the Bank of Japan’s (BoJ) monetary policy announcement.

Japan’s latest inflation data strengthen the argument for additional monetary tightening, although the BoJ is widely expected to leave its policy rate at 1.25% when it announces its decision on Friday. Annual inflation excluding fresh food picked up from 1.7% to 2.1% in September. Stripping out both fresh food and energy, the rate increased from 1.9% to 2.4%.

With markets increasingly anticipating a December rate rise, close attention will be paid to comments from BoJ Governor Kazuo Ueda. He recently stated that “underlying inflation is near the 2% target.” Ueda also cautioned that “if the policy rate isn’t adjusted properly, market concerns about inflation risks could raise long-term rates.”

Expectations of further tightening nevertheless offer only limited support to the Japanese yen (JPY), given Japan’s comparatively low interest rates and concerns about its substantial debt burden. With energy-related inflation risks from the Middle East conflict keeping other central banks hawkish, the BoJ’s measured pace may do little to close the interest rate gap with other major economies.

In the UK, Wednesday’s Budget will be scrutinised for how the government reconciles support for the economy with fiscal discipline. Tax and spending adjustments could affect the British pound (GBP) before the Bank of England’s (BoE) policy decision on 5 November. Traders have fully priced in a 25-basis-point increase in interest rates.

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 has been challenged, however, by what they describe as “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 more aggressive use of PuFins than they had previously envisaged.