GBP/JPY strengthens above 199.00 on renewed Japan tariff uncertainty
- GBP/JPY trades in positive territory around 199.20 in Tuesday’s early European session.
- Japan's Akazawa said he had a phone call with US Commerce Secretary Lutnick.
- Concerns about UK fiscal risks might cap the GBP’s upside.
The GBP/JPY cross gains momentum to near 199.20 during the early European session on Tuesday. The Japanese Yen (JPY) softens against the Pound Sterling (GBP) on trade woes after US President Donald Trump reiterated that he plans to impose 25% tariffs on goods from Japan.
Trump said late Monday that he plans to impose 25% tariffs on goods from Japan in the latest development of his chaotic trade war. Japan's top trade negotiator, Ryosei Akazawa, said on Tuesday that he had a phone call with US Commerce Secretary Howard Lutnick for 40 minutes, adding that he agreed to actively engage in trade negotiations.
However, Japanese officials kept defending what needed to be defended. Akazawa further stated that the automobile sector is the core of Japan's economy and cannot tolerate fact 25% tariff on automobiles, as auto parts, is inflicting huge losses on Japanese firms. The tariff uncertainty is likely to undermine the Japanese Yen and create a tailwind for the cross in the near term.
On the other hand, the fresh escalation in United Kingdom (UK) fiscal risks might cap the upside for the Pound Sterling. Last week, UK Chancellor of the Exchequer Rachel Reeves breached her own fiscal rules by raising the standard allowance for Universal Credit, which is estimated to raise the financial burden by £4.8 billion by fiscal year 2029-2030. According to a Barclays analysis, the UK government would most likely need to raise taxes in the Autumn Budget to address rising budgetary concerns.
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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