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Fiscal Expansion Constrains Yen Performance, BOJ Rate Hike Effects May Be Diminished
Forex
Summary:
Tokyo’s inflation decline exceeded expectations, but it is unlikely to prevent the Bank of Japan from continuing to raise interest rates.
Buy
TradingGBPJPY
EXP
211.355
Entry Price
215.750
TP
208.000
SL
210.620 -0.653 -0.31%
0
Point
Flat
208.000
SL
CLOSING
211.355
Entry Price
215.750
TP
Fundamentals
On Wednesday, GBPJPY saw a modest increase. Due to the holiday, trading was light, resulting in smaller price fluctuations. However, the overall trend remained upward.
Data released by Japan's Ministry of Internal Affairs and Communications on Friday showed that Tokyo's inflation cooled more than expected, with the pressure from food and energy prices easing. However, this is unlikely to deter the Bank of Japan from continuing to raise interest rates.
The sub-index shows that Tokyo's consumer price index excluding fresh food rose by 2.3% YOY in December, a marked slowdown from the previous month's 2.8%. This is the first time that inflation has slowed since August, mainly reflecting the deceleration in food price increases and the decline in energy costs. Previously, the market had expected the index to slow down to 2.5%. The overall inflation index fell from 2.7% in the same period of the previous year to 2.0%; and the core inflation index, which excludes energy prices, also slowed to 2.6%.
Tokyo's inflation data is usually regarded as a leading indicator of the national inflation trend. Despite a noticeable slowdown in overall inflation, it remains above the Bank of Japan's 2% target, keeping the central bank on track for further policy tightening. (This is seen as bullish for the yen.)
However, the Japanese government's plan to announce a record budget of over 120 trillion yen for the fiscal year 2026 will undermine the Bank of Japan's efforts to combat inflation. On Thursday, Takaichi Sanae stated that the total budget for the fiscal year starting in April 2026 is approximately 122.3 trillion yen (about 786 billion US dollars). This represents an increase of about 6.3% from the 115.2 trillion yen allocated for the current fiscal year and is the largest initial budget on record.
Takaichi Sanae said that in order to help raise funds, the government plans to raise about 29.6 trillion yen through the issuance of new government bonds. She also said that the budget's reliance on debt issuance will drop from 24.9% this year to 24.2%.
Takaichi Sanae said, “I believe this budget has struck a balance between strengthening the economy and ensuring fiscal sustainability.” In addition to the new bond issuance, tax revenue will be key to funding the budget, with tax revenue expected to be about 83.7 trillion yen next year.
Since U.S. President Trump launched a global trade war this year, the yen has weakened overall. Concerns about fiscal policy under Takaichi Sanae's leadership as well as the slow progress of the monetary policy normalization process have continued to put pressure on the yen. Against this backdrop, the pound has risen about 6.9% against the yen so far this year, reaching its highest level since August 2008. This reflects the ongoing policy divergence between the UK and Japan.
Technical Analysis
During the day, the trend of GBPJPY is neutral to the upside. If it breaks below the support level at 206.74, a rebound is likely. On the upside, if it breaks through the 61.8% retracement of the range between 199.04 and 205.30 at 211.98, the current upward trend is expected to continue, with the next target at the 100% retracement level of 219.99.
Trade Recommendations
Trade Direction: Buy
Entry Price: 210.00
Target Price: 215.75
Stop Loss: 208.00
Valid Until: January 12, 2026, 23:55:00
Support: 209.81/209.29/208.21
Resistance Levels: 211.98/212.82/215.10
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