Pound to Yen Rate Leaps 1.0% as New Japanese PM Cools Rate Hike Talk

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The Japanese Yen was under pressure after the Japanese Prime Minister cooled expectations for further interest rate hikes.

"I do not believe that we are in an environment that would require us to raise interest rates further," freshly minted Prime Minister Shigeru Ishiba said following a meeting with Japan's central bank governor.

Ishiba had previously made comments that suggested he was supportive of a higher interest rate environment, but this no longer appears to be the case, prompting financial markets to expect fewer rate hikes than previously expected.

The Pound to Yen exchange rate is over 1.0% higher on the day at 192.79 amidst this alignment, with Dollar-Yen 0.90% higher at 144.85.

"I remain convinced that the BoJ will only deliver one or two hikes at most over the next year and that will likely keep the JPY currency as the funder of choice for global FX markets. Talk of a big rush back to Japan for Japanese investments in the US or Europe are premature at this stage," says W. Brad Bechtel, a strategist at Jefferies.

A funding currency is one that can be borrowed at low interest rates and invested into one that offers higher interest rates. With the Bank of England commanding the second-highest policy rate in the G10, and the Bank of Japan the lowest, Pound-Yen will be pointed higher as long as volatility remains low.

Ryosei Akazawa, Japan's new economy minister, also signalled a preference for limited rate hikes as Japan needed to exit a multi-year period of deflation.

Following the meeting with the Prime Minister, Bank of Japan Governor Ueda said his colleagues will "adjust the degree of monetary support cautiously, as we can afford to spend time scrutinising (economic) developments."

The market sees no changes to interest rates at the October 30-31 meeting, with the next hike not seen until well into 2025.

Only 20 bp of total tightening is priced in over the next 12 months.

The tide could be about to turn against the Yen once more, but the Bank of Japan will hope that rate cuts elsewhere will limit the damage.