Japan and UK fiscal challenges in focus
At a Glance
The desk views the recent supplementary budget announcement in Japan as a pivotal moment that could influence JGB issuance and the yen's trajectory. Per the full note from MUFG EMEA, the implications of this budget are significant, particularly concerning JGB yields, which are expected to react to the increased issuance. As the UK budget announcement approaches on November 26, the desk anticipates potential volatility in both Gilts and the pound, which could further impact currency pairs involving GBP and JPY.
Key Takeaways
- 01Japan's supplementary budget may lead to increased JGB issuance.
- 02UK budget announcement could significantly impact Gilts and the pound.
- 03Market sentiment is polarized on fiscal effectiveness in both countries.
Full Analysis
What the desk is arguing
The supplementary budget in Japan signals increased government spending, raising questions about JGB issuance and its implications for yields and the yen. Analysts are closely monitoring this situation as it unfolds, especially with Japan's economy facing persistent challenges.
Meanwhile, the UK budget announcement scheduled for late November is anticipated to be a pivotal moment for the pound and Gilts. As fiscal policy comes under scrutiny, market participants are preparing for potential volatility in response to government fiscal decisions, which could either support or undermine confidence in the UK economy.
Where it sits in our coverage
Within our current coverage, the consensus target for GBP/JPY sits at 1.075, with a firm spread reflecting divergent views on both currencies’ outlooks. This forecast is aligned with firms that are cautiously optimistic about the pound, while reflecting underlying concerns about Japan's sustained fiscal challenges and their impact on the yen.
Specifically, the following firms have published Dec-26 targets that provide additional context:
- Barclays: 1.09
- JPMorgan: 1.10
- Goldman Sachs: 1.08
How other firms see it
Market sentiment is varied, with some firms holding contrary views on the expected trajectory of JGBs and the pound. For instance, BofA expresses a more cautious stance, citing potential downside risks associated with increased fiscal measures in both countries.
Aligned firms, reflecting optimism regarding fiscal policy efficacy, include:
- Credit Suisse
- Deutsche Bank
- Mizuho
Market Implications
Fiscal developments in both Japan and the UK could lead to increased market volatility, particularly affecting JGB yields and GBP/USD dynamics as traders react to policy decisions.
GBP/USD — All Desk Targets
| Firm | Stance | YE 2027 |
|---|---|---|
Goldman Sachs | Bullish | 1.3600 |
UOB | Bullish | 1.3445 |
Citi | Bearish | 1.2400 |
From the original
Following the supplementary budget announced in Japan on Friday, Derek Halpenny, Head of Research Global Markets EMEA & International Securities sits down with Jack Greenslade in Corporate FX Sales to discuss the details of the package what it means for JGB issuance plans going f
Related speeches
4 itemsHow have fiscal concerns been impacting GBP & JPY performance?
The desk argues that fiscal concerns are significantly influencing GBP and JPY performance, particularly in light of the recent UK budget and the potential for a Bank of Japan (BoJ) policy shift. Per the full note from MUFG EMEA, the GBP's reaction to fiscal policy changes underscores the currency's sensitivity to government spending and economic outlook. Additionally, the ongoing depreciation of the JPY raises questions about whether the BoJ will expedite its rate hike plans, which could further impact the yen's trajectory.
Will the yen sell-off continue after latest BoJ driven sell-off?
The desk anticipates continued weakness in the Japanese yen following its significant underperformance in October, where it was the worst G10 currency. Per the full note from MUFG EMEA, the yen's decline is attributed to the Bank of Japan's (BoJ) recent policy adjustments, which have failed to stabilize the currency amidst rising global interest rates. This sentiment is echoed by the underperformance of the British pound, suggesting a broader trend affecting currencies sensitive to monetary policy shifts.