GBP/JPY climbs as Yen weakens on fiscal stimulus and BoJ decision looms

• GBP/JPY trades near 204.00, extending gains for the third straight day
• The Yen remains under pressure after Japan's new PM Takaichi signals a large fiscal stimulus plan.
• Investors await the BoJ interest rate decision on Thursday, with Governor Ueda's comments in focus.

The British Pound (GBP) extends gains against the Japanese Yen (JPY) on Monday, with GBP/JPY hovering around 203.85 as the Yen remains under broad pressure against its major counterparts. The softness in the Japanese currency follows reports that newly appointed Prime Minister Sanae Takaichi is preparing a sizeable fiscal stimulus package to support households and businesses.

While the spending plan is aimed at boosting domestic demand, markets view it as negative for the Yen because it reduces the likelihood of near-term policy tightening by the Bank of Japan (BoJ).

Meanwhile, an improved risk sentiment is adding to the Yen's weakness. Hopes that the United States (US) and China are moving closer to a trade deal have lifted equities across the curve and boosted demand for riskier assets.

Investors are now waiting for the Bank of Japan's (BoJ) monetary policy announcement on Thursday. The central bank is widely expected to keep its benchmark rate unchanged at 0.50%, as policymakers assess the impact of recent policy shifts on the economy. Swaps markets assign only about 11% probability of a 25-basis-point rate hike this week but see nearly 50% odds of a move by December, with a full quarter-point increase priced in by the first quarter of 2026.

Governor Kazuo Ueda's comments will be key for guidance on whether the BoJ still plans to raise rates to 0.75 percent by the end of the year or prefers to stay cautious given soft wage growth and new fiscal support.

With no major UK economic releases due this week, Sterling's direction will likely be influenced by broader risk sentiment and upcoming fiscal headlines. Investors are watching developments ahead of the November 26 Budget, where Chancellor Rachel Reeves faces pressure to close an estimated £22 billion fiscal gap through potential tax adjustments and spending restraint.

Speaking at the Future Investment Initiative -- known as "Davos in the Desert" -- in Riyadh, Saudi Arabia, on Monday, Chancellor Reeves said, "We are looking at both tax and spending to keep to fiscal rules."

Fiscal uncertainty may limit upside momentum in the Pound in the near term, though overall monetary policy divergence with Japan continues to favor GBP/JPY on dips.