GBP/JPY eases after Takaichi defeat removes impediment to rate hikes

• GBP/JPY is selling off after Sanae Takaichi’s defeat in Japan’s ruling party leadership runoff.
• Takaichi warned that if elected, she would prevent the BoJ from raising interest rates.
• The pound retreats after Bailey points to steady return to a more normal rate environment.

GBP/JPY is down nearly a percentage point and a half from trading at 191.50s on Friday after news that former Japanese Defense Minister Shigeru Ishiba defeated challenger Sanae Takaichi to win the ruling LDP leadership race. Ishiba won with 215 votes to Sanae Takaichi’s 194 votes.

The Japanese yen had weakened on fears that Takaichi could win after she said that if elected she would not allow interest rates to rise because a weak yen is positive for exports. Her defeat now means she won’t be able to restrict rate hikes.

The yen’s immediate reaction was to strengthen in all its pairs. The expectation of higher interest rates is positive for the currency as it reduces capital outflows to currencies that offer higher yields.

GBP/JPY came under further pressure after the Japanese yen rose following the release of Tokyo inflation data on Friday morning. The data showed Tokyo’s consumer price index (CPI) rose 2.2% in September, which, while lower than the previous 2.6%, was in line with the BoJ’s forecast and the median . BoJ Governor Kazuo Ueda said if inflation data met the bank’s forecasts, he would press ahead with plans to raise interest rates.

Sterling, meanwhile, remains on a weaker footing after Bank of England (BoE) Governor Andrew Bailey said earlier in the week that he saw interest rates continuing to gradually decline. Lower interest rates are negative for the pound as they reduce capital inflows.

“I think the path for interest rates is going to be down, gradually, to the ‘neutral’ rate,” Bailey said on Tuesday. The neutral interest rate is the long-run equilibrium or “ideal” level for interest rates in the economy.

His remarks come after a narrow five-to-four vote at the BoE’s August meeting backed a quarter-point cut by the bank, pushing borrowing costs to 5.00%. Meanwhile, financial markets fall to 4.5% by the end of 2024 and 3.5% by the end of 2025.

GBP/JPY was supported on Wednesday, however, after BoE policymaker Megan Greene was more dovish than Bailey when she said “a cautious, steady approach to easing monetary policy is appropriate”.

Greene added: “I think the risks to activity are on the upside, which could suggest that the long-term neutral rate is higher and – all else being equal – our policy stance is not as tight as we thought. ” Greene was one of four MPC members who voted to keep rates in August.