UK Budget approaches as British Pound advances against Japanese Yen

• Ahead of the UK Autumn Forecast Statement, selling weighs on the British Pound against its peers.
• GBP 20bn of investment over the next five years will be announced by UK Chancellor Healey, according to FT.
• Gradual policy tightening is expected to remain the BoJ’s course.

A 0.18% rise puts the Pound Sterling near 210.30 against the Japanese Yen (JPY). The Yen is the exception to the British Pound’s (GBP) weakness against its major currency peers on Tuesday.

Ahead of Wednesday’s United Kingdom (UK) Autumn Forecast Statement, Sterling remains under pressure.

GBP 20bn investment push via PuFins signalled by UK budget leaks

A two-stage increase in investment had been the baseline scenario for Deutsche Bank economists. 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 shifted, however. They note 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 financing needs, 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).” Applying the OBR’s own modelling, the economists conclude that “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 investment spending exceeding earlier assumptions has reduced a major Budget Day risk, 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.”

For the November policy meeting, financial markets are confident of a 25 basis points (bps) interest rate increase by the Bank of England (BoE), taking the rate to 4%.

Despite market experts expecting continued gradual monetary tightening by the Bank of Japan (BoJ), the Japanese Yen is also underperforming.

2.4% core inflation and wage ambitions support BoJ normalisation expectations

Firmer underlying price pressures in Japan are supporting the policy outlook, according to MUFG/BTMU analysts, who describe domestic developments as "reinforcing expectations for gradual BoJ policy normalisation,". Core inflation excluding fresh food and energy "accelerated to 2.4%yoy in September from 1.9% in August," they note. Rengo’s ambition of "wage increases of around 6% in 2027." also underpins labour-market dynamics. In this context, MUFG/BTMU observe that "markets are pricing one to two BoJ rate hikes over the next 12 months," pointing to a measured tightening path that is becoming increasingly credible.

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