GBP/JPY holds ground after two days of losses, trading around 210.70 during the European hours on Wednesday. The currency cross showed limited movement amid holiday-thinned trading, while the Japanese yen (JPY) weakened as traders assessed the impact of the country’s expansive fiscal policy.
The Japanese cabinet recently approved Prime Minister Sanae Takaichi’s record ¥122.3 trillion budget, aiming to strike a balance between aggressive fiscal spending and debt management by limiting new bond issuance. However, Japan’s fiscal position remains a concern: public debt already exceeds twice the size of the economy, leaving the government with little room to deploy bold stimulus measures.
The JPY’s decline was partly cushioned by expectations of a Bank of Japan (BoJ) rate hike at the July meeting, after the bank raised its policy rate to a 30-year high of 0.75%. Further support came from signals of possible intervention, as Finance Minister Satsuki Katayama stressed Japan’s freedom to act against excessive currency moves.
The GBP/JPY cross may further gain ground as the Pound Sterling (GBP) receives support from the cautious tone surrounding the Bank of England’s (BoE) policy outlook. Governor Andrew Bailey said during the December post-meeting press conference that rates are likely to continue on a gradual downward path, but “how much further we go becomes a closer call” with each cut.
Reuters reported that money markets expect the BoE to deliver at least one rate reduction in the first half of the year and are pricing in nearly a 50% probability of a second cut before the end of the year.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.
Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
Read the full article here
