GBP/JPY climbs as Yen falters on fiscal concerns and BoE interest rate decision looms

• GBP/JPY extends gains as the Yen stays under pressure amid concerns over PM Sanae Takaichi’s expansionary fiscal stance.
• Markets remain focused on Japan’s February 8 snap election.
• Attention shifts to the UK, where the Bank of England is widely expected to hold interest rates at 3.75% on Thursday.

The British Pound (GBP) strengthens against the Japanese Yen (JPY) on Tuesday, as the Yen remains under broad pressure amid market concerns over Prime Minister Sanae Takaichi’s expansionary fiscal stance. At the time of writing, GBP/JPY is trading near 213.26, rising for a third straight day.

Investor focus is squarely on Japan’s snap election on February 8, after Sanae Takaichi dissolved the lower house last month. A decisive majority for the ruling Liberal Democratic Party (LDP) would be seen as strengthening Takaichi’s mandate to push ahead with a more expansionary fiscal agenda, reviving concerns that higher government spending could add to Japan’s already heavy public debt burden.

Meanwhile, the Yen’s excessive weakness remains a key concern among Japanese authorities. Japan’s Finance Minister Satsuki Katayama said on Tuesday that she would not comment on whether any foreign exchange intervention had been conducted, following market reports of a so-called “rate check” that briefly triggered a short-lived correction in the Yen.

Katayama added that Japan will continue to closely coordinate with US authorities, based on the joint Japan-United States statement issued in September last year, and will respond appropriately, keeping intervention risks in focus.

On the data front, the Japanese economic calendar is relatively light this week, leaving the spotlight on the UK, where the Bank of England (BoE) is set to announce its interest rate decision on Thursday.

Markets widely expect the BoE to keep interest rates unchanged at 3.75% on Thursday. The decision comes as inflation pressures remain elevated, with the headline Consumer Price Index (CPI) accelerating to 3.4% YoY in December from 3.2% in November.

However, investors continue to expect scope for rate cuts later this year, after policymakers said at their previous meeting that the scale and timing of further easing would depend on how the inflation outlook evolves, noting that policy is likely to follow a gradual downward path.