GBP/JPY reaches fresh 16-month highs above 205.50

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GBP/JPY extends its winning streak for the fourth consecutive session, reaching 205.52, the highest since July 2024, during the Asian hours on Thursday.

GBP/JPY hit a 16-month high of 205.52 as traders expect PM Takaichi to announce a stimulus package.
Reuters poll suggests most economists expect the BoJ to lift rates to 0.75% at the December meeting.
The Pound Sterling could struggle as cooling price pressures strengthened BoE rate cut bets in December.

GBP/JPY extends its winning streak for the fourth consecutive session, reaching 205.52, the highest since July 2024, during the Asian hours on Thursday. The currency cross gains ground as the Japanese Yen (JPY) declines on the potential for Japan’s Prime Minister Sanae Takaichi to unveil a stimulus package exceeding JPY 20 trillion.

Members of the ruling Liberal Democratic Party (LDP) also proposed a supplementary budget exceeding JPY 25 trillion to support the plan, well above last year’s JPY 13.9 trillion extra budget. The massive spending plan raised market caution amid concerns about Japan’s fiscal health.

However, the upside of the GBP/JPY cross could be restrained as the JPY may receive support on the Reuters poll, indicating the Bank of Japan (BoJ) appears poised to raise interest rates to 0.75% from 0.50% at its December 18–19 meeting. Forecasts remain closely balanced, 53% of respondents anticipate a December hike, and all economists who offered a longer-term view expect rates to reach at least 0.75% by the end of Q1 2026.

BoJ board member Junko Koeda said in a speech Thursday that supply–demand indicators show the output gap near 0% and that labour markets remain tight amid a growing labour shortage. Koeda stated that “in this situation, I believe the bank must continue to raise the policy interest rate and adjust the degree of monetary accommodation in accordance with improvement in economic activity and prices.” She emphasized that ongoing economic and price trends warrant further policy adjustment.

Additionally, the GBP/JPY cross may edge lower as the Pound Sterling (GBP) could face challenges amid signs of cooling price pressures, which have strengthened expectations for a Bank of England (BoE) rate cut in December. After the UK CPI release, traders raised the probability of a December BoE cut to 85% from 80% before the data.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

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.

How do the decisions of the Bank of Japan impact the Japanese Yen?

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.

How does the differential between Japanese and US bond yields impact the Japanese 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.

How does broader risk sentiment impact the Japanese Yen?

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.