Ahead of UK Budget, British Pound strengthens against Japanese Yen

• Selling pressure weighs on the British Pound against its peers as markets await the UK Autumn Forecast Statement.
• Plans for GBP 20bn of investment over the next five years will be announced by UK Chancellor Healey, according to FT.
• Expectations point to continued, gradual policy tightening by the BoJ.

Losses against most major peers mark Tuesday’s trading for the British Pound (GBP), with the Japanese Yen (JPY) the exception. Sterling has gained 0.18% against the Yen to trade near 210.30.

Pressure on Sterling comes as markets await Wednesday’s Autumn Forecast Statement in the United Kingdom (UK).

Do UK budget leaks signal a bigger GBP investment drive through PuFins?

A two-stage investment expansion had been the baseline for economists at Deutsche Bank. They had expected the Chancellor 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 assessment has been challenged, however, by reports they describe as follows: “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 states 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).” Their assessment of the growth impact draws on the OBR’s modelling: “using the OBR’s multipliers, we estimate that projected financial transactions could result in a 0.5% boost to GDP by 2031/32.”

The prospect of a larger investment programme than initially assumed has also changed Deutsche Bank’s assessment of Budget Day risks. 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.”

A 25 basis points (bps) increase in interest rates to 4% at the November policy meeting is confidently anticipated by financial markets for the Bank of England (BoE).

The Japanese Yen, meanwhile, remains a laggard despite market experts expecting the Bank of Japan (BoJ) to continue tightening monetary policy gradually.

Are Japan’s inflation and wage ambitions strengthening BoJ normalisation bets?

A clear strengthening of underlying price pressures is central to MUFG/BTMU analysts’ view that domestic developments are "reinforcing expectations for gradual BoJ policy normalisation," in Japan. Excluding fresh food and energy, Japan’s core inflation "accelerated to 2.4%yoy in September from 1.9% in August," while Rengo’s target of "wage increases of around 6% in 2027." supports labour-market dynamics. In this setting, the analysts 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%.