GBP/JPY weakens to near 197.00 as BoJ holds rates steady

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The GBP/JPY cross faces some selling pressure to around 197.10 during the Asian trading hours on Thursday. The Japanese Yen (JPY) strengthens against the Pound Sterling (GBP) after the Bank of Japan (BoJ) interest rate decision.

GBP/JPY loses ground to near 197.10 in Thursday’s Asian session.
The BoJ left policy settings unchanged at its July meeting on Thursday.
Cooling UK labor market paves the way for more interest rate cuts by the BoE.

The BoJ decided to keep the short-term interest rate target unchanged in the range of 0.40%-0.50% at its July meeting on Thursday. The decision aligned with the market expectations. The JPY attracts some sellers in an immediate reaction to the rate decision. The Japanese central bank extended the pause in its rate-hiking cycle into the fourth consecutive policy meeting in a row after delivering a 25 basis points (bps) hike in January.

According to BoJ’s quarterly Outlook Report, uncertainty over trade policy and its developments, impact on economic and price outlook remains high, and underlying inflation is likely to stall due to slowing growth but gradually accelerate thereafter

On the other hand, rising expectations that the Bank of England (BoE) will cut interest rates in next week’s monetary policy meeting continue to drag the GBP lower. Traders have become increasingly confident that the UK central bank will reduce its key borrowing rates on August 7, as UK labor market conditions have cooled down, following an increase in employers’ contributions to social security schemes.

Bank of Japan FAQs

What is the Bank of Japan?

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%.

What has been the Bank of Japan’s policy?

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.

How do Bank of Japan’s decisions influence 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.

Why did the Bank of Japan decide to start unwinding its 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.

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