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.
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:
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.
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.
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.
Risks to this view
Risks include potential market overreaction to the fiscal announcements, global economic conditions impacting investor sentiment, and unexpected shifts in central bank policy that could alter the currency dynamics.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Derek Halperny, Head of Research, Global Markets, EMEA, and International Securities. It's Friday 21st November 2025 and joining Derek to pose some questions on the financial market themes for the week ahead is Jack Greenslade, Deputy Head of UK, Ireland, Swiss and Middle East Corporate Sales. The following podcast is intended for professional investors and eligible counterparties only and not for retail clients.
Any content should not be regarded as an offer to conduct investment business or an investment recommendation, but for information purposes only. Hi Derek, how are you? Hi Jack, yes, all good, all good.
It's podcast, so it's Friday. It is. That was good.
Freezing Friday, wrapped up very warm today, chilly. Indeed, winter has begun. Yeah, indeed, it's taken a turn, hasn't it?
Well, it's also taken a turn, dollar-yen, I guess the big mover of the week on speculation for the size of the fiscal stimulus package. So I thought maybe we could talk about that. Perhaps you could run through some of the details of the stimulus package, you know, the size of the JGB issuance needed, etc.
Yes, like I think, you know, we've had the drip feed of information, I think, in the Japanese media. So as the week kind of unfolded, the markets were positioning for the potential for it to be bigger than expected. Originally, it was supposed to be similar to last year, $13.9, $14 trillion.
Then we heard reports of $17, then we even heard reports of $25 trillion. And it's kind of bigger. General account expenditure, $17.7.
Overall, $21.3 when you include tax cuts. So it's definitely larger than what was originally expected. But I think by the time we got confirmation of that today, you know, the JGB yields have been moving higher.
The 30-year traded over $3.40 for the first time ever yesterday. So in that context, as I said, as the week was unfolding, the markets were positioning for something that came or something that would be potentially bigger. So that has allowed for the markets to retrace a little bit today.
So JGB yields have backed off a bit. And the yen is currently a little bit stronger. It's up about, no, dollar yen's down about half a percent.
Other factors, of course, tech, equity sell-off, JGB's following Treasury. So that Treasury yields down a bit yesterday. So international factors as well.
But I think a bit of a kind of a seller rumor by the fact in terms of the yen and JGB's once we have the package released. It's, you know, what I would say is that the government have come out with an estimate of a 1.4% lift to GDP annually over a three-year period, amounting to about 24 trillion yen. I think that's, I'd be highly sceptical of that estimate.
And we always get these kind of estimates when we get these supplementary budget packages. And it never delivers because basically Japanese households are more inclined to save more than what the assumptions are when the government make these estimates, which is totally understandable. Because if you're a Japanese household, you know the fiscal position, you know the debt levels, you're more concerned about the future.
A lot of these tax measures are temporary and therefore more is saved than anticipated. The inflation impact is probably more credible. A reduction of about 0.7 percentage points on inflation.
But again, that's just going to be temporary with the subsidy on utility bills in the February, April period next year. So from a monetary policy perspective, I don't think that really has much implication. In terms of JGB issuance, again, it's a little bit murky at the moment because we don't have a full picture in terms of the potential tax revenue surpluses, because that will go into the pause in terms of financing this package.
But if you take the increase in the general government expenditure, 17.7 trillion compared to the 13.9 trillion last year, that's about a 25, 26, 27% increase. The JGB issuance requirement last year was 6.7 trillion in addition. So given this is a little bit bigger, I think the markets now are anticipating JGB issuance that could be a bit bigger than last year as well.
All the governments have done is they've committed to ensuring that total JGB issuance for the year will be less than last year. Last year, it was 42.1 trillion in total. And this year, we're talking at 28.6.
So in other words, they've got about 13.5 trillion to play with to keep the promise of issuing less than last year. It'll be less than that. As I said, if it's bigger than 6.7 trillion, which is what we had last year, maybe the market's positioned for something like 8.5 trillion of additional issuance.
We've had a jump in yields. The 30-year in the month of November is up 35 basis points to the high that we got to yesterday. We traced a bit of that today.
So I think the market is a lot better positioned. But I'm concerned. I think the risks are building that you could get some further volatility and some further spikes in JGB yields going forward from here.
The idea of fiscal expansion to reduce inflation is nonsense, really. And I don't think the markets are going to buy it. And with the BOJ, the way they're behaving, with the perceptions of Takeuchi being a reflationist, the risks are there that we could get some further abrupt moves to the upside, which creates volatility in rates, creates volatility in FX.
And that, of course, then could bring in the potential for intervention, because we're certainly getting into the zone where that could happen. Yeah, for sure. You talk about intervention there.
I mean, how do you judge the risks? We've had a lot of verbal intervention, let's say, over the last few days. But where do you see that?
Yeah, well, Finance Minister Katayama upped the ante today in terms of the tone of the rhetoric. She also made reference to the agreement that was reconfirmed between the US and Japan in September. And I think within that, there was a support for market-driven rates, but there was a caveat in terms of intervention if required.
And of course, the comments that we've had this week and again today was that the move was very one-sided, and there was extreme concern expressed. So, you know, I think we're heading towards 160. My view has been that they would probably come in before the 160 level.
I think you have to also consider Trump in all of this. I don't think Trump will be particularly happy with the fact that Dalian has jumped considerably since the trade deal that was implemented, which has gone live. I think in that sense, there will be an incentive for the MOF to intervene.
So, I don't think we're too far away from it. What do you think are the kind of signs that our clients should look out for, that something might be imminent without giving away, I guess, firm details, but what are the kind of things you look out for? Well, really, the MOF are very quick if there's compelling evidence in terms of big moves, volatility.
That's been a favourite kind of justification in the past. It also kind of allows them to intervene and not for it to be deemed or perceived as being just about a level. So, if we did get a pickup in volatility, I think definitely they would probably use that to come in.
But other than that, it's really the comments, Jack, and as I mentioned, the tone of those comments have definitely increased today. So, another day or two of a grind higher in Dalian and those comments being repeated, they will either lose credibility and be ignored, or they'll follow through to give them credibility and I think, as I said, they'll become compelled if they keep speaking and Dalian keeps going. So, yeah, I would say if we're 158, 159 next week, and we might not, of course, because we've retraced a little bit lower today, but if we do get back up there, I would imagine the rhetoric would toughen and that would be the catalyst for intervention.
Yeah, of course, they'll be, you know, stepping into, they can't change the fundamentals, let's say. So, I guess it's more down to the Bank of Japan and how quickly they look to hike rates as well. Yeah, like the Bank of Japan is a real problem in all this.
You know, if you consider their raise rates in January, and they've been talking about these risks that have made them cautious about acting again, it was trade tariffs for a lot of the year. Now, those risks have received it somewhat. So, you know, the justification for doing nothing is becoming more and more difficult to understand.
And I think, yes, you're right, if they're going to come in and intervene, if they are putting pressure on the BOJ to not raise rates, I would imagine a decision to intervene would also coincide with maybe a nudge that, you know, it's justifiable that maybe a rate hike is delivered. Now, there's only four basis points priced for the December meeting. So, I think December is still a big ask, but FX is really important in that.
If we did see a big move to the upside, I think that the tone of rhetoric from the BOJ could change suddenly, that could trigger a kind of a rethink in terms of December. I think December is still unlikely. But by January, I think definitely, we should expect a 25 basis point hike.
And that's priced at about, I think, 16, 17 basis points at the moment. Okay. And I just thought we'd shift over to the other big event that's coming up next week, UK budget.
Obviously, we covered off some of this in our recent webinar. But, you know, what can we expect on Wednesday? Well, you know, we've had some big moves in gilts.
So, gilts had a massive outperformance in the month of October, high to low. The gilts, long-end gilts was down about 40 basis points. It was a big move to the downside.
And then about half of that was retraced in just a couple of days last week when we had that news about the income tax hike not being included. So, I guess, based on the drip feed of information from the government, and we may get a bit more of that before Wednesday next week, particularly maybe over the weekend, it looks like they won't include income tax hikes. Now, it seems like the OBR has come back with maybe better information on the projections going forward than the government were originally thinking.
So, the snapshot in which they measure the projections going forward in terms of market rates was taken a little bit later than usual, that captured much of that big drop in gilt yields that I just spoke about, which, of course, is beneficial in terms of debt financing assumptions, costs for the government going forward. So, ultimately, what will be most important on Wednesday, in my view, is a combination of the headroom plus the measures obviously being credible and not so big in terms of tax hikes that investors start to question the growth projections that go with that. So, headroom has been 10 billion in the last couple of budget announcements, which clearly hasn't been enough.
The markets won't accept anything less than 15. Ideally, it should be 20. What you would hope, given Rachel Reeve's experiences in the previous budget announcements, is that they will make sure that there isn't a negative gilt market reaction, because that would be, I think, the worst case scenario, especially given Keir Starmer's position.
That's another story that could come to the fore. Will Keir Starmer survive? There's expectations that there could be a leadership challenge next year.
But if there was a disastrous budget next week that saw a gilt market sell-off, that challenge could come a lot quicker than expected. Yeah, I'm sure she'll be thinking about the reactions from Quasi-Kwarteng's budget not so long ago. Yeah.
I mean, yeah, of course, Liz Tross and that whole move, that lingers in the market still to this day. I think that's definitely been one of the factors that has resulted in a gilt market underperformance. For sure.
But I think, sorry, the other important thing to say, Jack, and this is a bit of good news, is that this really is the first budget where I think, well, since the global inflation shock, since the Liz Tross budget, where you have at least more compelling evidence that inflation and wages are coming down. We're in the best position since the global inflation shock. And that was part of the reason why gilt yields dropped so much in October.
So at least the backdrop, fundamentally, for the gilt market is a bit more favorable. And that improves the risks that you don't get a nasty reaction on Wednesday. Yeah.
I'm sure, obviously, you know, the budget coming up played into the Bank of England's last policy meeting. But what are the sort of policy meeting implications for December post the budget? Like we're about 22 basis points priced now, so we're pretty much fully priced for a cut.
And that's been down to the inflation data and the last two inflation prints and the wage data being positive in terms of weaker wage growth. We've still got another, so it's still a couple of more risk events. But the implications in the budgetary perspective, a tougher budget in terms of more tax increases, I don't think that's going to change the dial very much because we're pretty much fully priced for the December meeting.
I think where you get a move is that it's not as fiscally tight as expected. And then the market starts to doubt the pricing for a December cut. But again, given the fact that you still have another inflation report, you still have another jobs report.
And the last two inflation reports have been better than expected. It would take a lot, I think, for the markets to shift the short term expectations in terms of a move, a cut from the BOE. From a BOE perspective, the budget is probably the less important determinant of a cut.
It's really inflation and the fact that inflation is coming down a bit quicker than expected. Okay. And last but not least, do you have any trade ideas?
Well, to be honest, we've been wrong on Dolly M. We've had that in place, a short Dolly M position in place for a while. So our stock loss level has been hit.
So we're out of that. So we'll just wait. I still think the next big move is down.
But there's risks both ways. And intervention obviously plays into that as well. And then we still have a long Euro-Sterling position.
And has continued to underperform. Euro-Sterling has continued to drift higher. So we still have that.
And we'll run that through the budget, I think, and into the MPC meeting in December. So still have a view that the pound can underperform going into year-end. Perfect.
Well, thank you so much for speaking with me, Derek. Okay. Thanks, Jack.
Have a good weekend. You too. Thank you for listening to this MUFG Global Markets podcast.
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