GBP/JPY holds near YTD highs as Bailey flags sticky inflation, BoJ remains cautious

• The GBP/JPY cross trades near year-to-date highs around 198.30, up over 3.6% on the week.
• BoE’s Bailey signals “gradual and careful” approach, says inflation still persistent.
• UK labor market shows signs of slack, supporting disinflation and rate cut expectations.

The British Pound (GBP) strengthens modestly against the Japanese Yen (JPY) on Thursday, with the GBP/JPY pair trading near year-to-date highs. While gains are limited, the cross remains underpinned by a broadly bullish technical setup, keeping the uptrend intact.

Although the GBP/JPY pair attracted some selling pressure early in the day, buyers stepped in during the American session, reversing the intraday dip. The cross is currently trading around 198.35, just below Wednesday’s high, and remains up nearly 3.65% for the week.

Speaking at the British Chambers of Commerce Global Annual Conference in London on Thursday, Bank of England (BoE) Governor Andrew Bailey delivered a cautious yet balanced assessment of the UK economy. He acknowledged that while “significant progress” has been made on disinflation, with headline inflation rising to 3.4% in May and expected to stay around 3.5% into autumn, inflationary pressures remain sticky, particularly in core components like services and food. “Monetary policy needs to stay restrictive for long enough to squeeze out remaining persistence in inflationary pressures,” Bailey said, reiterating that the BoE’s approach will remain “gradual and careful” rather than follow a “pre-set path.”

Bailey also pointed to a softening labor market, with data showing over 100,000 fewer payrolled workers in May and firms scaling back hiring in response to rising National Insurance costs. “We are seeing slack open up,” he noted, framing the trend as a key disinflationary force. On the broader economic outlook, he stressed that low and stable inflation remains the most important contribution monetary policy can make to long-term sustainable growth. His remarks, while not overtly dovish, reinforced expectations for cautious easing later this year, helping to keep the British Pound supported near its year-to-date highs against the Yen.

On the other side of the equation, the Japanese Yen’s trajectory remains closely tied to the Bank of Japan’s (BoJ) cautious normalization stance amid rising inflationary pressures. While Japan’s Consumer Price Index (CPI) has surged—driven by higher food and energy costs—Governor Kazuo Ueda and the BoJ board remain divided on how aggressively to respond. Hawkish board member Naoki Tamura this week suggested the central bank may need to consider “decisive” rate hikes if inflation persists, reflecting growing concern over entrenched cost-push dynamics. Still, Ueda has reiterated a data-dependent approach, emphasizing that any further tightening will hinge on sustained wage growth and a stable inflation trend above the BoJ’s 2% target.

Although the BoJ ended its negative interest rate policy, the current rate remains at just 0.5%, still well below that of its global peers. This has eroded the Yen’s traditional “safe-haven” appeal. While persistent inflation supports a gradual shift toward further tightening, the BoJ’s measured pace has kept the Yen on the defensive, limiting its ability to offset the Pound’s strength and pushing GBP/JPY toward fresh year-to-date highs.

Looking ahead, Japan will release key economic data on Friday, including June Tokyo CPI, May Unemployment Rate, and Retail Trade.