GBP/JPY Extends Rally as Yen Softens on Risk Fears

Key Moments

Cross Gains but Momentum Remains Subdued

The GBP/JPY pair moved higher for a third straight session after briefly retreating to the 214.30-214.25 band during the first half of the European trading day on Wednesday. The cross subsequently climbed to a new weekly peak but showed little follow-through, holding around 214.70 and registering a daily advance of less than 1.10%.

Yen Under Pressure as Geopolitics and Energy Risks Persist

The Japanese Yen (JPY) continued to lag its peers as market participants focused on the potential drag from the Middle East conflict and ongoing disruptions to energy flows through the Strait of Hormuz. These concerns have reinforced expectations that Japan’s economy could remain under pressure.

At the same time, a softer US Dollar (USD) provided a lift to the British Pound (GBP), adding another layer of support for the GBP/JPY cross as trading unfolded.

BoJ Hike Expectations and Intervention Risk Temper Yen Weakness

Despite the broader softness in JPY, selling pressure remained constrained. Market participants increasingly accepted the prospect that the Bank of Japan (BoJ) will raise interest rates at its upcoming monetary policy meeting on June 15-16. This shift in expectations followed data showing that Japan’s Producer Price Index (PPI) accelerated in May at the fastest pace in more than three years, highlighting ongoing cost pressures from higher energy and raw material imports.

Speculation that Japanese policymakers could step in again to bolster the currency also restricted deeper Yen losses. Japan’s Finance Minister Satsuki Katayama reiterated on Tuesday that the official “stance is unchanged and authorities are prepared for decisive measures.” This signaling discouraged traders from adding substantial new long positions in GBP/JPY and acted as a brake on further gains in the cross.

GBP/JPY Snapshot

Bank of Japan: Mandate and Policy Framework

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.

Impact of BoJ Policy on the Japanese Yen

The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.

Drivers Behind the Shift Away from Ultra-Loose Policy

A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.