British Pound trades sideways against the Japanese Yen as traders weigh intervention risks
- GBP/JPY consolidates near two-week highs as traders remain alert to possible Japanese FX intervention.
- Wide interest-rate differentials continue to weigh on the Japanese Yen despite rising JGB yields.
- UK Q1 GDP is revised lower, offering little fresh support to the British Pound.
GBP/JPY trades in a narrow range on Tuesday, struggling to build on the previous day's gains as traders remain wary of a possible intervention by Japanese authorities after the Japanese Yen (JPY) weakened to a fresh 40-year low against the US Dollar (USD). At the time of writing, the cross is trading around 214.70, hovering near two-week highs.
Japan's Chief Cabinet Secretary, Minoru Kihara, reiterated that authorities are "always prepared to take necessary steps" in the foreign exchange market if needed. However, Kihara declined to comment on any specific exchange-rate level.
Japan has already spent more than ¥11.7 trillion intervening in the currency market this year. However, the Yen remains under pressure, with its weakness primarily driven by the wide interest-rate differential between Japan and other major economies, which continues to support carry trades.
The Bank of Japan's (BoJ) shift away from ultra-loose policy has done little to stem the Yen's decline even as Japanese Government Bond (JGB) yields continue to climb. The BoJ raised its policy rate by 25 basis points to 1.0% at its latest meeting and signaled further rate hikes ahead. However, the pace of normalization remains slow.
BoJ new board member Ayano Sato said on Tuesday, "foreign exchange shifts must reflect fundamentals," adding that "a weak Yen lifts exports but raises import costs, driving down real household income."
On the UK side, the latest Gross Domestic Product (GDP) data did little to provide fresh support for the British Pound (GBP). The UK economy expanded by 0.6% quarter-on-quarter in the first quarter, matching both the preliminary estimate and market expectations. However, annual GDP growth was revised down to 0.9% from the preliminary estimate of 1.1%.
Bank of Japan FAQs
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%.
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.
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.
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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