• GBP/JPY rises to its highest level since January 2008 as the Japanese Yen stays under pressure.
• Wide interest-rate differences continue to support carry trades and weigh on the Yen.
• Traders remain alert for possible intervention from Japanese authorities.

GBP/JPY edges higher on Monday, climbing to levels last seen in January 2008 as the Japanese Yen (JPY) remains under pressure across the board. The Yen resumed its decline after a brief pullback last week, with USD/JPY climbing back to its highest level in four decades. At the time of writing, the cross is trading around 216.75, up 0.60% on the day.

The persistent weakness in the Yen is keeping traders alert to the risk of foreign exchange intervention, with Japanese officials repeatedly stating they stand ready to act against excessive currency moves if necessary.

The Yen's recent weakness increasingly appears to be driven by crowded speculative bets. However, structural headwinds remain, including plans by Japan's Prime Minister to increase government spending, which could worsen the fiscal outlook at a time when the country's debt-to-GDP ratio is already above 250%.

The Bank of Japan (BoJ) ended more than a decade of ultra-loose monetary policy in March 2024 and has gradually raised interest rates since then, lifting its policy rate to 1.0% from 0.75% at its June meeting, the highest level since 1995. Even so, the pace of policy normalization remains slow, leaving Japan's interest rates well below those of other major economies.

The wide interest-rate differential continues to weigh on the Yen by encouraging carry trades, in which investors borrow at Japan's relatively low borrowing costs to invest in higher-yielding currencies such as the British Pound (GBP).

Meanwhile, the BOJ's hawkish stance has lifted Japanese Government Bond (JGB) yields, but the move has failed to support the Yen because higher yields also raise future debt-servicing costs. The benchmark 10-year JGB yield climbed to 2.83% on Monday, its highest level since May 1997.

With the UK and Japan economic calendars relatively light this week, traders are likely to keep a close eye on any signs of foreign exchange intervention from Japanese authorities.