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

• Japanese Yen weakness against its major peers gives GBP/JPY an upward bias.
• A possible December rate rise is in focus as the BoJ is expected to leave rates unchanged on Friday.
• Wednesday’s UK Autumn Budget draws attention before the BoE’s November monetary policy meeting.

GBP/JPY is trading around 210.18 at the time of writing. The cross is up 0.19% on Monday, recording modest gains as the Japanese Yen (JPY) lags its major peers. Trading nevertheless remains largely confined to a range. Traders are preparing for this week’s key events, including the UK Budget and the Bank of Japan’s (BoJ) monetary policy announcement.

A policy rate of 1.25% is widely expected to remain in place when the BoJ delivers its interest rate decision on Friday. Recent Japanese inflation data strengthen the argument for additional tightening. Annual inflation excluding fresh food quickened from 1.7% to 2.1% in September. Excluding both fresh food and energy, the rate increased from 1.9% to 2.4%.

With markets increasingly anticipating a December rate rise, attention will centre on comments from BoJ Governor Kazuo Ueda. He recently stated 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.”

Japan’s comparatively low interest rates and concerns about its heavy debt burden continue to constrain the support that further tightening expectations provide for the Japanese Yen (JPY). A gradual tightening path from the BoJ may barely reduce the rate differential with other major economies. Energy-related inflation risks arising from the Middle East conflict are keeping other central banks hawkish.

For the UK, Wednesday’s Budget is the immediate focus. Traders will assess how the government reconciles economic support with fiscal discipline. Adjustments to taxation and expenditure could affect the British Pound (GBP) before the Bank of England’s (BoE) November 5 policy decision. A 25-basis-point rate rise is fully priced in by traders.

Ahead of the Autumn Budget, Deutsche Bank economists Sanjay Raja and Maui Brennan say 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. The economists observe 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 more aggressive use of PuFins than they had previously envisaged.