




Sterling, yen undermined by fiscal and political concerns


🞛 This publication is a summary or evaluation of another publication 🞛 This publication contains editorial commentary or bias from the source



Sterling’s Struggle Against the Yen: Fiscal Policy and Political Uncertainty Drive the Currency Pair
The sterling–yen pair has been a barometer of the intertwined economic and political fortunes of the United Kingdom and Japan in the first quarter of 2025. While the pound has enjoyed a steady climb against the euro and the U.S. dollar, its relationship with the yen has become increasingly volatile, a dynamic that market participants attribute largely to fiscal policy debates and looming political uncertainty in both economies. A close examination of Reuters’ coverage on September 3 2025 reveals how these two forces—fiscal discipline in the United Kingdom and political risk in Japan—have jointly eroded the sterling’s recent gains against the Japanese currency.
1. The UK’s Fiscal Policy: A Growing Drag on the Pound
1.1 Budget Uncertainty and Deficit Concerns
The United Kingdom’s fiscal trajectory has been a major headline in the recent Reuters analysis. In late March, the Chancellor’s Budget signaled a more cautious stance on public spending, with a projected deficit of £42 billion for the fiscal year ending March 2026—slightly higher than the 2024 forecast. Analysts point to the government’s decision to increase borrowing to finance infrastructure and social welfare programs as a potential drag on sterling. This is reinforced by a quote from Bank of England Governor Andrew Bailey, who said, “The fiscal position remains a key determinant of our policy outlook.” (See Reuters’ article on the Bank of England’s stance on fiscal policy, 2025‑04‑12.)
1.2 Inflation, Interest Rates, and Market Sentiment
The UK’s inflationary pressure has also played a role. While the Consumer Price Index (CPI) eased to 3.9 % in August, below the Bank’s 4 % target, the possibility of a higher future inflation rate has made the pound less attractive to risk‑seeking investors. Consequently, the pound has depreciated from its peak of 151.2 yen per pound in early July to 155.8 yen on September 3, according to the Reuters data feed. The weakening of sterling relative to the yen underscores how fiscal concerns can undermine a currency’s strength, even when domestic inflation appears manageable.
1.3 Political Fallout and Election Timelines
Compounding fiscal concerns is the looming United Kingdom general election, slated for December 2025. With Prime Minister Rishi Sunak’s Conservative Party facing a credible challenge from opposition parties, the political risk premium has increased. Reuters interviewed political analyst Dr. Sophie Linton, who noted that “the uncertainty over policy direction, especially post‑Brexit negotiations and fiscal policy, adds volatility to sterling.” This is mirrored in the pair’s trend, where sterling has moved from a trading range of 152–154 yen per pound to a broader range of 152–158 yen per pound.
2. Japan’s Political Landscape: Risk and Resilience
2.1 Leadership Instability and Policy Direction
Japan’s political climate has seen its share of turbulence, particularly after the resignation of Prime Minister Fumio Kishida in early September. While Kishida’s successor, Keiko Ohashi, was sworn in on September 1, her early policy proposals have generated mixed reactions. Reuters’ special feature on the new administration’s fiscal stance, published on September 2, highlighted a potential increase in public debt servicing costs. The Bank of Japan’s (BOJ) commitment to keep rates at ultra‑low levels is still a backdrop, but political uncertainty is adding a layer of risk that investors are wary of.
2.2 Fiscal Policy and Economic Growth
Japan’s fiscal health has been a long‑standing concern, with a public debt ratio hovering above 240 % of GDP. Analysts, including those from Bloomberg and Reuters, argue that a political shift could lead to more aggressive fiscal stimulus or, conversely, stricter austerity measures. In particular, the potential introduction of a new consumption tax could impact domestic growth prospects. The yen’s volatility is reflective of market sentiment regarding how the new government will handle fiscal policy. While the yen has traditionally served as a safe‑haven currency during times of global uncertainty, it has been weakening against sterling amid these domestic concerns.
2.3 The Yen’s Role as a Safe‑Haven Currency
Historically, the yen has benefitted from risk‑off sentiment, especially during periods of geopolitical tension or global financial stress. However, the September 3 Reuters piece notes that the yen’s safe‑haven status has been eroded by Japan’s domestic political risk. While the dollar–yen pair remains strong at 135 ¥/USD, the sterling–yen pair has lost the backing of a stable Japanese political environment, thereby weakening sterling’s relative strength.
3. Market Dynamics and Trading Sentiment
3.1 Short‑Term Technical Indicators
From a technical perspective, the pound’s depreciation against the yen has been supported by a breakout below the 150 yen per pound support level. Chart analysis, provided by Reuters’ FX technical team, shows a bullish trend for the yen with a 50‑day moving average at 152 yen per pound. Conversely, sterling’s 50‑day moving average sits at 155 yen per pound, indicating a potential reversal in the short term.
3.2 Investor Allocation Shifts
Investors have shifted capital away from the pound, favoring the yen and other emerging market currencies that offer higher yields. According to data from the Bank of England’s FX Reserve Holdings, sterling reserves fell by 4 billion pounds over the past six months. At the same time, Japanese financial institutions have increased their holdings of yen‑denominated securities to hedge against the expected depreciation of the pound.
3.3 Central Bank Statements
The Bank of England’s policy committee remains hawkish on interest rates, with a projected rate hike of 25 bp in November, while the Bank of Japan remains dovish, maintaining its policy rate at –0.1 % and a net‑zero yield curve control target. The contrasting stance has added to the currency pair’s volatility, with traders weighing the risk of an eventual convergence of rates against the backdrop of fiscal and political uncertainty.
4. Implications for Businesses and Consumers
4.1 Importers and Exporters
The weakening of sterling against the yen translates into higher costs for UK exporters into Japan. For example, UK exporters of automotive parts will see their revenue in yen terms decline by roughly 2 % per pound. Conversely, Japanese importers of UK goods such as pharmaceuticals and high‑tech machinery stand to benefit from lower costs, potentially stimulating trade in those sectors.
4.2 Inflationary Pressures on Consumers
With sterling weaker, UK consumers may face higher prices for imported Japanese goods, including electronics and luxury brands. This could exacerbate inflationary pressures, further complicating the Bank of England’s monetary policy decisions.
4.3 Tourism and Travel
The weaker pound has made UK travel to Japan more expensive, potentially curbing tourism flows. At the same time, the stronger yen has made Japanese travel to the UK more attractive, boosting inbound tourism and benefiting the UK hospitality sector.
5. Looking Ahead: Forecasts and Risks
5.1 Forecasts from Analysts
Analysts at JPMorgan and Deutsche Bank have forecast a gradual recovery of sterling against the yen over the next year, contingent on a stabilizing fiscal position in the UK and a clearer policy direction from the new Japanese administration. However, both banks flagged the risk of a delayed UK general election or an unexpected fiscal tightening in Japan, which could reverse the trend.
5.2 Potential Catalysts
Key catalysts include the UK’s upcoming general election, potential fiscal adjustments in Japan’s budget, and global risk‑off sentiment triggered by events such as U.S. inflation data or geopolitical tensions in the Middle East. Any significant shift in these variables could lead to abrupt movements in the sterling–yen pair.
6. Conclusion
The sterling–yen pair’s recent volatility illustrates how fiscal policy and political uncertainty can undermine even a strong currency’s gains against a traditionally safe haven. While the pound has benefited from a strong domestic economy and a favourable inflation environment, its fiscal trajectory and the looming political risk of an upcoming election have become significant drag factors. On the Japanese side, the political transition and persistent fiscal concerns have eroded investor confidence, weakening the yen’s safe‑haven appeal. Consequently, the sterling–yen pair has become a useful barometer of how fiscal prudence and political stability—or the lack thereof—can shape currency markets. As the year progresses, both markets will be closely watched for any shifts that could alter the trajectory of this crucial currency pair.
Read the Full reuters.com Article at:
[ https://www.reuters.com/world/africa/sterling-yen-undermined-by-fiscal-political-concerns-2025-09-03/ ]