GBP/JPY Exchange Rate: How Will the Japanese Political Jitters and the US-Japan Trade Deal Influence the GBP/JPY Pair

Recent headlines about Japan PM Ishiba’s resignation and the US-Japan trade deal are causing fluctuations in the GBP/JPY exchange rate. While an improved market mood following the president's announcement of the US-Japan trade deal, along with easing trade concerns, bolstered the safe haven JPY, increasing political worries could dampen the currency.

On Wednesday, US President Donald Trump announced that the United States (US) has a trade deal with Japan. Trump further stated that he had just completed a massive deal with Japan, perhaps one of the largest. Officials also added that “Japan will invest 550 billion US dollars into the United States. Japan will pay reciprocal tariffs to the United States of 15 percent. Japan will open their country to trade, including cars and trucks, rice, and certain other agricultural products, among other things.” Meanwhile, Japan's top trade negotiator Ryosei Akazawa posted on Twitter, saying, “Mission Complete.” Bank of Japan Deputy Governor Shinichi Uchida said on Wednesday that the trade deal between the United States and Japan is a significant step forward and helps reduce uncertainty for Japan's firms. He also reflected that uncertainty remains regarding the impact of tariffs on the economy. There are always upside and downside risks to the outlook, as the trade deal reduces uncertainty for Japan's firms.

On the political front, markets became cautious after reports suggested that Japanese Prime Minister Shigeru Ishiba might resign by the end of August. This speculation followed the defeat of his ruling Liberal Democratic Party (LDP) in the upper house election on Sunday, as reported by the Mainichi newspaper. Ishiba clarified on Wednesday that he had not discussed his resignation and stated that media reports about his potential departure are entirely false. However, domestic political uncertainty caps the JPY gains. Japan's ruling coalition, the Liberal Democratic Party (LDP) and its junior partner Komeito, failed to secure a majority in the upper house election on Sunday. Having already lost its majority in Japan's more powerful lower house last year, the outcome is expected to weaken the coalition's influence.

On the policy front, slowing economic growth, declining real wages, and signs of cooling inflation could enable the Bank of Japan (BoJ) to hold off on raising interest rates in the near term. This, in turn, acts as a headwind for the JPY. Japan’s National Consumer Price Index (CPI) rose by 3.3 percent year on year in June, compared to the previous reading of 3.5 percent, according to the latest data released by the Japan Statistics Bureau on Friday. Further details reveal that the National CPI excluding fresh food reached 3.3 percent year on year in June, versus 3.7 percent previously. The figure was in line with market expectations. CPI excluding fresh food and energy increased by 3.4 percent year on year in June, compared to the previous reading of 3.3 percent.

Meanwhile, investors remain cautious amid concerns about the potential economic fallout from US President Donald Trump's unpredictable trade policies, which in turn may bolster the safe-haven JPY. On Wednesday, Bank of Japan Deputy Governor Shinichi Uchida stated that Japan's economy has recovered moderately, though certain areas show signs of weakness. He mentioned that the initial effects of US tariff hikes on Japanese companies are likely to influence export profitability or volume. The Bank will closely monitor how these risks, both positive and negative, impact their inflation outlook through corporate wage and price-setting behaviours. To maintain economic and price stability, monetary policy may need to be adjusted to effectively balance these risks.

Sterling wavered as UK fiscal risks re-emerged following the government borrowing report from the Office for National Statistics (ONS) on Tuesday. The report revealed that the administration borrowed the second-highest amount of funds since 1993 to offset the rise in debt costs, which accelerated due to higher inflation. Increasing UK borrowings set the stage for tax rises in the government's upcoming Autumn Statement. UK official data showed that public sector net borrowing reached £20.7 billion last month, exceeding the expected £17.1 billion for June, as forecast by the Office for Budget Responsibility (OBR). This data has heightened investors’ speculation that Chancellor Rachel Reeves might need to raise taxes in the Autumn budget to meet her targets for fixing the public finances.

Investors are awaiting the preliminary United Kingdom (UK) S&P Global Purchasing Managers’ Index (PMI) data for July, scheduled for release on Thursday. They will closely monitor the UK PMI data for clues about whether the impact of a hiring slowdown has begun affecting the economy. The report is expected to show that overall business activity grew modestly. The Composite PMI is forecast to have fallen slightly to 51.9 from 52.0 in June. UK employers have limited new hiring to offset rising employee costs, following the increased contributions to social security schemes. The Office for National Statistics (ONS) reported on Thursday that the ILO Unemployment Rate rose to 4.7 percent in the three months ending May, the highest since the quarter ending July 2021. Meanwhile, a smaller-than-expected decline in payrolls over the same period suggests that labour market conditions are not as weak as previously thought. According to the employment report, the number of workers laid off was revised down to 25,000 from an earlier estimate of 109,000. Average Earnings, a key indicator of wage growth, increased nearly in line with expectations. The rising unemployment rate and slowing wage growth indicate that employers are adjusting their labour policies to counteract the rising costs of social security.

Meanwhile, market expectations for the Bank of England’s (BoE) interest rate decision in the upcoming monetary policy announcement next month will be a key trigger for the Pound Sterling. The market anticipates that the BoE will cut the interest rate by 25 basis points following the release of the hotter-than-expected Consumer Price Index (CPI) report. Headline inflation rose to 3.6 percent year on year, the highest level since January 2024. Economists had expected the inflation data to have increased steadily to 3.4 percent. The core CPI, which excludes volatile items such as food, energy, alcohol, and tobacco, rose 3.7 percent, exceeding expectations and the previous reading of 3.5 percent. On a monthly basis, the headline CPI grew by 0.3 percent, also faster than anticipated and the prior figure of 0.2 percent. Meanwhile, inflation in the services sector, an indicator closely monitored by Bank of England (BoE) officials, increased steadily to 4.7 percent.

Concerns surrounding Japan’s politics, including a potential political shake-up or resignation, as well as British inflation data and global trade tariff uncertainties, may influence market sentiment regarding the GBP/JPY exchange rate.

---

Stay Ahead in the Currency Game

Whether you're a daily FX trader or handle international transactions regularly, our 'Currency Pulse' newsletter delivers the news you need to make more informed decisions. Receive concise updates and in-depth insights directly in your LinkedIn feed.

Subscribe to 'Currency Pulse' now and never miss a beat in the currency markets!

---

Ready to act on today’s insights? Get a free quote or give us a call on: +44 (0)20 7740 0000 to connect with a dedicated portfolio manager for tailored support.

---