GBP/JPY nears YTD highs above 198.00 amid a moderate risk appetite
- The Pound resumed its positive trend as the safe-haven Yen struggles in risk-on markets
- A divided BoJ committee puts further rate hikes into question and adds bearish pressure on the Yen,
- GBP/JPY has rallied 1.6% over the last five days, nearing the YTD highs at 198.20 and 198.25.
The Pound has reversed Tuesday’s pullback and resumed its broader bullish trend on Wednesday, fuelled by the ongoing risk appetite. The Yen is trading lower across the board in the aftermath of the ceasefire in the Middle East, with the Bank of Japan divided about further monetary tightening
A fragile peace between Iran and Israel holds for the second day, which keeps investors' mood positive. The US intelligence, however, reported that the attacks might have only delayed Tehran’s nuclear program by months, which casts doubts about a durable peace
A divided BoJ puts further rate hikes into question
In Japan, macroeconomic data have beaten expectations, with the Leading Economic Index improving against expectations. On the other hand, however, the divergence within BoJ officials regarding the ban’s monetary policy is acting as a headwind for the JPY.
The Summary of Opinions from the Bank of Japan's last week’s meeting revealed that the committee is divided about its tightening cycle. Part of the board is in favour of keeping rates on hold until the inflationary impact of Trump’s tariffs clarifies, with one member calling for decisive rate hikes even in the uncertain economic context.
This divergence puts the bank’s monetary policy normalisation cycle into question, adding pressure on the Yen, already weighed by investors’ appetite for risk. The pair has rallied about 1.6% in the last five trading days and is approaching year-to-date highs, at 198.20 and 198.25.
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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