GBP/JPY bounces up from lows, nears 206.00 as risk-aversion eases

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The Pound is trading higher against the Japanese Yen on Tuesday. The pair has returned to the upper range of the 205.00s and is trading at 205.85 in the early London trading session, retracing losses from a nearly 0.7% sell-off to the 205.20 lows on Monday.

The Pound picks up to 205.96 highs after bouncing at 205.20 against the Yen.
A positive auction of Japanese bonds has soothed markets on Tuesday.
BoJ Governour Ueda signalled a rate hike in December and sent the Yen rallying on Monday.

Comments from the Governour of the Bank of Japan (BoJ), Kazuho Ueda, affirming that the bank is contemplating the “pros and cons” of hiking interest rates in December, rattled markets, pushing the Japanese Yen higher acrross the board.

A well-received Japanese Government Bond auction on Tuesday has somewhat soothed markets, pushing the Yen lower against its main peers and providing some support to the Sterling. Market sentiment, however, remains cautious, which is keeping the Pound from rallying further for now.

In the UK, the Bank of England released its Financial Stability report earlier on Tuesday. The BoE warned about the higher risks of a stock market crash amid the “materially stretched” valuations of AI companies and the use of debt to finance the sector. The impact on the pound, however, has been marginal.

The economic docket for the UK and Japan is thin on Tuesday, but growing hopes that the BoJ will tighten its monetary policy in December or January, and recent intervention warnings by Japanese officials are likely to keep the Yen supported this week.

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.