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• GBP/JPY moves little amid holiday-thinned trading.
• The Japanese Yen struggles due to the impact of Japan’s expansive fiscal policy and a record ¥122.3 trillion budget.
• The Pound Sterling gains amid a cautious outlook surrounding Bank of England policy.

GBP/JPY holds ground after two days of losses, trading around 210.70 during the European hours on Wednesday. The currency cross showed limited movement amid holiday-thinned trading, while the Japanese yen (JPY) weakened as traders assessed the impact of the country’s expansive fiscal policy.

The Japanese cabinet recently approved Prime Minister Sanae Takaichi’s record ¥122.3 trillion budget, aiming to strike a balance between aggressive fiscal spending and debt management by limiting new bond issuance. However, Japan’s fiscal position remains a concern: public debt already exceeds twice the size of the economy, leaving the government with little room to deploy bold stimulus measures.

The JPY’s decline was partly cushioned by expectations of a Bank of Japan (BoJ) rate hike at the July meeting, after the bank raised its policy rate to a 30-year high of 0.75%. Further support came from signals of possible intervention, as Finance Minister Satsuki Katayama stressed Japan’s freedom to act against excessive currency moves.

The GBP/JPY cross may further gain ground as the Pound Sterling (GBP) receives support from the cautious tone surrounding the Bank of England’s (BoE) policy outlook. Governor Andrew Bailey said during the December post-meeting press conference that rates are likely to continue on a gradual downward path, but "how much further we go becomes a closer call" with each cut.

Reuters reported that money markets expect the BoE to deliver at least one rate reduction in the first half of the year and are pricing in nearly a 50% probability of a second cut before the end of the year.

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