British Pound rises against Japanese Yen as UK Budget approaches

• Ahead of the UK Autumn Forecast Statement, the British Pound comes under selling pressure against its peers.
• GBP 20bn of investment over the next five years will be announced by UK Chancellor Healey, according to the FT.
• Expectations point to the BoJ continuing its gradual policy tightening.

A 0.18% rise takes the British Pound (GBP) to around 210.30 against the Japanese Yen (JPY) on Tuesday. The yen is the sole exception to sterling’s underperformance against its major currency peers.

Wednesday’s Autumn Forecast Statement in the United Kingdom (UK) is keeping sterling under pressure ahead of its release.

UK budget leaks signal greater GBP investment through PuFins

The baseline scenario at Deutsche Bank had envisaged the Chancellor opting to “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 assumption has been challenged, however, with the bank’s economists noting 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.”

On the financing implications, Deutsche Bank says that, “taking into account the slightly higher savings from HMRC, we project a near GBP 10bn increase per annum over the back half of the OBR’s forecast horizon, leaving the government’s gross financing requirement at just over GBP 250bn at the end of the forecast horizon (2030/31).” Applying the OBR’s own modelling, the economists calculate that “using the OBR’s multipliers, we estimate that projected financial transactions could result in a 0.5% boost to GDP by 2031/32.”

A larger anticipated investment package than previously assumed has changed the balance of risks, in Deutsche Bank’s view. The bank argues that “with investment spending now primed to be bigger than expected, one large tail risk for Budget Day has been removed with markets likely to adjust to the news ahead of the 28th of October.”

Turning to monetary policy, a 25 basis point (bps) interest rate increase to 4% by the Bank of England (BoE) at its November policy meeting is firmly expected by financial markets.

The Japanese Yen, meanwhile, is lagging despite market experts’ expectations that the Bank of Japan (BoJ) will continue tightening monetary policy gradually.

Japan’s inflation and wage goals strengthen BoJ normalisation expectations

Firmer underlying price pressures in Japan are drawing attention from MUFG/BTMU analysts, who describe domestic developments as "reinforcing expectations for gradual BoJ policy normalisation,". Core inflation excluding fresh food and energy, they note, "accelerated to 2.4%yoy in September from 1.9% in August,". In the labour market, Rengo’s aim of "wage increases of around 6% in 2027." provides support for wage dynamics. With these developments in view, MUFG/BTMU observe that "markets are pricing one to two BoJ rate hikes over the next 12 months," highlighting a tightening trajectory that remains measured but is gaining credibility.

At its policy meeting later this week, the BoJ is expected to leave interest rates unchanged at 1.25%.