GBP/JPY slumps to near 198.30 as Japanese Yen gains on US-Japan trade agreement
- GBP/JPY falls sharply to near 198.30 as the Japanese Yen gains on expectations that the BoJ could raise interest rates again this year.
- US-Japan trade deal confirmation renews hopes of BoJ tightening the monetary policy again.
- Investors await the flash UK PMI data for July.
The GBP/JPY pair trades 0.3% down to near 198.30 during the European trading session on Thursday. The cross faces selling pressure as the Japanese Yen (JPY) outperforms on hopes that the confirmation of a trade agreement between the United States (US) and Japan would pave the way for more interest rate hikes by the Bank of Japan (BoJ) this year.
On Tuesday, US President Donald Trump confirmed through a post on Truth.Social that Washington and Tokyo have reached a trade pact. Trump added that Washington will charge 15% on imports of Tokyo that doesn’t come under the sectoral levy universe. Washington also reduced the automobile levy to 15% from 15% as imposed on other nations.
According to the latest Reuters poll on BoJ’s monetary policy outlook, a slight majority expects that the Japanese central bank will raise interest rates to 0.75% in the last quarter of the year, which currently stands at 0.5%. The poll also showed that majority of economists expect the BoJ to leave interest rates unchanged in policy meetings next week.
Meanwhile, political uncertainty in Japan has also eased as Prime Minister Shigeru Ishiba has denied reports stating that he will resign by the end of August. On Wednesday, a report showed that PM Ishiba will step down by the August-end.
In the United Kingdom (UK), investors await the preliminary S&P Global Purchasing Managers’ Index (PMI) data for July, which will be published at 08:30 GMT. The PMI report is expected to show that the overall private sector activity continued to expand. However, the pace of expansion was slightly moderate.
Japanese Yen FAQs
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.
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.
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.
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.
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