Japan’s Economic Indicators The Bank of England (BoE) is set to announce its interest rate decision amidst ongoing high inflation in the UK, which remains above the 2% target. The UK’s Consumer Price Index (CPI) rose to 3.4% year-on-year, while core inflation stayed at 3.2%. The BoE adjusts interest rates to control inflation, which impacts the value of the Pound Sterling. Higher interest rates are beneficial for GBP because they attract global investment, while lower rates have the opposite effect. The BoE also uses tools like Quantitative Easing and Quantitative Tightening in unusual economic situations. Market Outlook Last year, around January 2025, the market was concerned about a weakening Yen due to soft inflation data. There was an expectation that the Bank of Japan would take its time, in contrast to the Bank of England, which was keeping rates steady to control inflation. This difference in policy was a major factor driving GBP/JPY strength. Looking back, the Bank of Japan did raise rates slightly for the first time in April 2025, but additional increases never happened as the economy stayed weak. Throughout 2025, Japan’s core inflation averaged only 1.9%, struggling to reach the central bank’s 2% goal. This situation kept the BoJ inactive since that initial hike. Meanwhile, the Bank of England’s circumstances changed significantly over the past year. After maintaining rates at 3.75% until mid-2025, signs of a slowing economy and easing inflation led to a change in policy. With the latest data showing UK annual CPI dropped to 2.4% in December 2025, the BoE has reduced its base rate twice, bringing it down to 3.25%. This shift has transformed the outlook compared to a year ago, as the interest rate gap that favored the Pound has decreased considerably. Derivative traders should note that the BoE is now firmly on a path of rate cuts, while the BoJ has little room to lower rates further. Strategies that protect against a decline in GBP/JPY or that benefit from reduced volatility are now more suitable than those aimed at significant increases. Create your live VT Markets account and start trading now.

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