GBP/JPY climbs back closer to mid-202.00s as Japan’s political landscape weigh on JPY

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The GBP/JPY cross attracts fresh buyers following the previous day's two-way price moves and climbs closer to mid-202.00s during the Asian session on Tuesday.

GBP/JPY regains positive traction on Tuesday as a combination of factors exert pressure on the JPY.
Takaichi becomes Japan’s next PM, fueling bets for more fiscal stimulus and loose monetary policy.
The still divergent BoJ-BoE expectations might hold back bulls from placing fresh bets and cap gains.

The GBP/JPY cross attracts fresh buyers following the previous day's two-way price moves and climbs closer to mid-202.00s during the Asian session on Tuesday. Spot prices, however, remain confined in a familiar range held over the past week or so, warranting caution before positioning for an extension of the recent bounce from last Friday's swing low, around the 200.65 region.

The Japanese Yen (JPY) extends its steady intraday descent after lawmakers in the Lower House have voted for Sanae Takaichi to become Japan's first female Prime Minister. Investors have been speculating that Takaichi would announce more expansionary policy in Japan., which could allow the Bank of Japan (BoJ) to further delay raising interest rates . This, in turn, is seen weighing on the JPY and acting as a tailwind for the GBP/JPY cross.

That said, Takaichi would still need cooperation from other opposition groups to pass any legislation as the fragile new coalition remains short of the 233 needed for a simple majority. Moreover, investors seem convinced that the BoJ will stick to its policy normalization path as inflation in Japan remains at or above the central bank's 2% target for more than three years, and the economy registered growth for a fifth straight quarter through June.

The relatively hawkish BoJ expectations mark a significant divergence in comparison to bets that the Bank of England (BoE) could continue cutting rates gradually. Adding to this, worries about the UK’s fiscal outlook ahead of the crucial Autumn budget in November might hold back traders from placing aggressive bullish bets around the British Pound (GBP). This, in turn, could keep a lid on any maeningful appreciation for the GBP/JPY cross.

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.