GBP/JPY slips after four-day rally as markets reassess BoJ policy outlook

• The British Pound eases slightly against the Japanese Yen on Thursday after four days of gains.
• Markets reassess the BoJ's policy outlook following Sanae Takaichi's leadership victory.
• The monetary policy divergence between the BoE and the BoJ continues to support the pair in the medium term.

The GBP/JPY pair edges lower on Thursday, trading around 204.40, down about 0.1% on the day. After four consecutive days of gains, the British Pound (GBP) takes a breather against the Japanese Yen (JPY).

In the United Kingdom, the Bank of England (BoE) remains caught between persistent inflation and slowing growth. Huw Pill, the BoE's Chief Economist, recently called for a "conservative" approach to rate-setting, while Catherine Mann, a member of the Monetary Policy Committee (MPC), argued that policy should stay "restrictive for longer" to contain inflationary pressures.

In Japan, Sanae Takaichi's victory in the Liberal Democratic Party (LDP) leadership race, paving the way for her likely appointment as Prime Minister, remains a key factor weighing on the Yen. Markets view her pro-stimulus and fiscally supportive stance as a signal that the Bank of Japan (BoJ) may delay any further rate hikes. Expectations for monetary tightening at the October 29-30 policy meeting have now shifted to December, notes Société Générale, keeping the Japanese Yen under pressure.

Recent Japanese economic data also argue against imminent monetary normalization. Nominal Cash Earnings rose only 1.5% YoY in August, far below the 4.1% forecast, while Real Wages fell 1.4%, marking the eighth consecutive month of decline. Weak wage growth continues to complicate the BoJ's tightening efforts, even as a depreciating JPY fuels imported inflation.

On Thursday, Etsuro Honda, economic adviser to the new LDP leader, said the BoJ should "be cautious about raising interest rates," adding that a weak JPY remains "positive for economic recovery." His remarks confirm expectations that Japan's next government will favor a continued accommodative stance, dampening prospects for near-term tightening.

Despite Thursday's mild pullback, GBP/JPY remains close to its yearly highs of 205.33 and retains a broadly bullish bias, supported by the wide monetary policy gap between the BoE and the BoJ.