GBP/JPY steadies as Japan's political uncertainty and UK fiscal risks weigh on markets

• GBP/JPY holds steady on Monday as traders weigh Japan's political turmoil and UK fiscal caution.
• Japan's coalition collapse clouds policy stability and adds pressure on the BoJ to stay patient.
• UK markets brace for Chancellor Reeves's first full Budget and potential targeted tax increases.

The British Pound (GBP) is treading water against the Japanese Yen (JPY) on Monday, as investors weigh renewed political uncertainty in Japan against lingering fiscal and monetary headwinds in the United Kingdom (UK). At the time of writing, GBP/JPY is trading little changed near 202.90, snapping a two-day losing streak with a modest gain of 0.45% on the day.

Market participants remain focused on how Japan's political flux may affect the Bank of Japan's (BoJ) policy path while reassessing the outlook for the Bank of England (BoE) amid persistent UK fiscal concerns.

In Japan, the collapse of the long-standing ruling coalition between the Liberal Democratic Party (LDP) and Komeito has injected fresh uncertainty into the political landscape. Opposition parties are forming alliances to challenge LDP leader Sanae Takaichi's bid for the premiership, raising doubts over the stability of Japan's next government.

The BoJ faces a tougher monetary policy path as political voices call for patience on further tightening. Takaichi, expected to become Japan's first female prime minister, has called for closer coordination between the government and the central bank. Her comments have reinforced speculation that the BoJ may keep interest rates unchanged for longer, limiting upside momentum in the Yen. While inflation remains around 2.7%, some policymakers still favor additional rate hikes, though others prefer patience to protect fragile growth.

Across the Channel, the UK faces its own credibility test. Chancellor Rachel Reeves is preparing her first full Budget for November. Markets are concerned that potential tax hikes aimed at meeting fiscal goals could further strain the fragile UK economy. Meanwhile, the BoE remains cautious. On Monday, BoE policymaker Megan Greene said the central bank still sees underlying growth as weak and the labor market as softening, even though inflation and wage growth remain strong. Greene warned that the disinflation process may be slowing and noted there is a case for keeping rates higher for longer, although policy is still expected to move gradually lower over time.

Looking ahead, Japan's economic calendar is relatively light this week. In the UK, attention will turn to Tuesday's employment data and remarks from BoE Governor Andrew Bailey, followed by monthly GDP figures on Thursday. Several additional BoE speakers are also scheduled throughout the week.