GBP/JPY slides below 203.00 as JPY gains strong traction on intervention speculation

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GBP/JPY retreats sharply from a nearly three-week high amid a broadly stronger JPY.
Comments from Japan's Economics Minister fuel intervention fears and boost the JPY.
The divergent BoJ-BoE policy expectations back the case for further intraday losses.

The GBP/JPY cross attracts some selling during the Asian session on Tuesday and for now, seems to have snapped a three-day winning streak to the 204.25 region, or a nearly three-week high touched the previous day. Spot prices slide below the 203.00 mark in the last hour and seem vulnerable amid a goodish pickup in demand for the Japanese Yen (JPY).

Japan's Economic Minister Minoru Kiuchi said that it is important for foreign exchange (FX) moves to reflect fundamentals and be stable, adding that he will scrutinize its impact on Japan’s economy. This fueled speculations about a possible government intervention to stem further JPY weakness. This, along with some repositioning trade ahead of this week's Bank of Japan (BoJ) policy meeting, prompts the JPY bears to lighten their bets and turns out to be a key factor exerting downward pressure on the GBP/JPY cross.

The BoJ is scheduled to announce its decision on Thursday and is anticipated to maintain the status quo amid expectations of aggressive fiscal spending under Japan's new Prime Minister Sanae Takaichi. That said, data released on Monday showed that Japan’s service-sector inflation rose for the second consecutive month in September. Moreover, consumer inflation in Japan has exceeded the BoJ's 2% target for well over three years. This, in turn, backs the case for an imminent rate hike in December or early next year.

A relatively hawkish BoJ outlook marks a significant divergence in comparison to expectations for further easing by the Bank of England (BoE). This, along with worries about the UK’s fiscal outlook ahead of the Autumn budget in November, continues to undermine the British Pound (GBP) and backs the case for a further depreciating move for the GBP/JPY cross. Hence, some follow-through weakness towards testing the 202.45 intermediate support, en route to sub-202.00 levels, now looks like a distinct possibility.

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.