GBP/JPY holds firm as Japan fiscal risks pressure the Yen, BoJ in focus

• GBP/JPY steadies near multi-decade highs as Yen weakness persists ahead of the BoJ interest rate decision.
• BoJ is widely expected to keep rates unchanged on Friday after raising its policy rate to 0.75% in December.
• Snap election and tax-cut plans stoke Japan fiscal fears, adding pressure on the Yen.

The British Pound (GBP) trades on the front foot against the Japanese Yen (JPY) on Thursday, as the Yen remains under broad pressure amid growing concerns over Japan’s fiscal stability, while markets brace for the Bank of Japan’s (BoJ) interest rate decision due on Friday. At the time of writing, GBP/JPY is trading near 213.00, holding close to levels last seen in July 2008.

Alongside the BoJ's monetary policy decision, the Yen is also facing another risk event as Prime Minister Sanae Takaichi is preparing to dissolve parliament on Friday and call a snap election for February 8.

The surprise move is aimed at backing her stimulus and tax-cut plans, including a recently announced two-year suspension of the 8% food consumption tax, while also reviving concerns that increased government spending will add to Japan’s already heavy public debt load.

Looser fiscal policy could also complicate the BoJ’s gradual rate-hike path, as heavier government borrowing and Japanese Government Bond (JGB) market instability raise the risk that higher rates could quickly lift debt-servicing costs, while the Yen’s recent excessive weakness reinforces concerns about inflation and strengthens the case for policy normalization.

That said, markets widely expect the BoJ to keep rates unchanged on Friday and maintain a cautious tone, keeping the door open to future hikes but avoiding any strong signals that could further destabilize the Yen and bond markets.

Ahead of the policy decision, attention is also turning to Japan’s National Consumer Price Index (CPI) data.

In the United Kingdom, the latest inflation figures released on Wednesday showed that the Headline CPI rose 0.4% on the month in December after falling 0.2% in November. On a yearly basis, inflation accelerated to 3.4% from 3.2%. The data trimmed hopes for a February Bank of England (BoE) rate cut, although markets still price in about 50 bps of easing over the next 12 months.

Looking ahead, traders are also awaiting the release of UK Retail Sales data alongside remarks from Bank of England policymaker Megan Greene on Friday.