• GBP/JPY lost its daily gains due to a severe UK political crisis and leadership uncertainty.
• Traders fear a UK leadership change could spark increased fiscal spending.
• The Japanese Yen may rise as BoJ policymakers weigh a June rate hike.

GBP/JPY pares its daily gains, trading around 213.60 during the Asian hours on Wednesday. The currency cross declines as the British Pound (GBP) loses ground due to a severe political crisis in the United Kingdom (UK), with over 80 Labour MPs calling for Prime Minister Keir Starmer to resign following disastrous local election results. Traders fear a leadership change could spark increased fiscal spending to woo voters, despite Starmer's claim that no contest exists.

The GBP/JPY cross remains flat as the Japanese Yen (JPY) holds losses after the release of Japan’s current account surplus, which increased to JPY 4,681.5 billion in March from JPY 3,625.3 billion in the same month a year earlier. These figures surpassed market expectations of JPY 3,879 billion, marking the largest amount on record.

However, the Japanese Yen may gain ground as the Bank of Japan’s April Summary of Opinions revealed that policymakers are considering further rate hikes as early as their next meeting, driven largely by inflation risks linked to rising oil prices.

The Organisation for Economic Co-operation and Development (OECD) has recommended that Japan primarily utilize consumption tax increases to bolster its national revenue. On the monetary front, the Bank of Japan (BOJ) is projected to raise short-term policy rates to 2% by the end of 2027, though it must remain flexible enough to modify the pace and maturity of its bond-buying activities should financial or bond market disruptions occur. Furthermore, the OECD advised stricter fiscal discipline, suggesting that the government limit the use of supplementary budgets to instances of significant economic shocks.