The GBP/JPY pair continues its winning streak for the fourth session in a row, reaching 205.52, the highest since July 2024, during the Asian hours on Thursday. The currency rose significantly as the Japanese Yen (JPY) fell amid the possibility of Japanese Prime Minister Sanae Takaishi unveiling a stimulus package exceeding JPY 20 trillion.
Members of the ruling Liberal Democratic Party also proposed a supplementary budget exceeding JPY 25 trillion to support the plan, much higher than last year’s supplementary budget of JPY 13.9 trillion. The massive spending plan has sparked market caution amid concerns about Japan’s financial health.
However, the upside for GBP/JPY could be restricted as the Japanese yen may receive support in a Reuters poll, indicating that the Bank of Japan (BoJ) looks set to raise interest rates to 0.75% from 0.50% at its meeting on December 18-19. Expectations remain closely balanced, with 53% of respondents expecting interest rates to rise in December, and all economists who provided a longer-term view expecting interest rates to reach at least 0.75% by the end of the first quarter of 2026.
Bank of Japan board member Junko Koeda said in a speech on Thursday that supply and demand indicators show the output gap near 0% and that labor markets remain tight amid a growing labor shortage. “In this situation, I believe that the bank should continue to raise the interest rate and adjust the degree of monetary easing in line with the improvement in economic activity and prices,” Koeda said. She stressed that economic trends and current prices call for further policy adjustment.
In addition, GBP/JPY may decline as the British pound may face challenges amid signs of slowing price pressures, which has reinforced expectations of a rate cut from the Bank of England (BoE) in December. Following the release of the UK CPI, traders raised the probability of a Bank of England cut for December to 85% from 80% before the data release.
Frequently asked questions about the Japanese Yen
The Japanese Yen (JPY) is one of the most widely traded currencies in the world. Their value is determined broadly by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the spread between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the powers of the Bank of Japan is to control the currency, so its movements are key to the yen. The Bank of Japan has intervened directly in currency markets on occasion, generally to devalue the yen, although it often refrains from doing so due to the political concerns of its major trading partners. The Bank of Japan’s ultra-loose monetary policy between 2013 and 2024 caused the yen to depreciate against its major counterparts due to the growing policy divergence between the Bank of Japan and other major central banks. More recently, the gradual dismantling of this ultra-lenient policy has given the yen some support.
Over the past decade, the Bank of Japan’s ultra-loose monetary policy stance has led to widening policy divergence with other central banks, especially the US Federal Reserve. This supported the widening of the spread between the US and Japanese 10-year bonds, which favored the US dollar against the Japanese yen. The Bank of Japan’s decision in 2024 to gradually abandon ultra-loose policy, along with interest rate cuts at other major central banks, are narrowing this spread.
The Japanese yen is often viewed as a safe investment. This means that in times of market stress, investors are more likely to put their money into the Japanese currency because of its supposed reliability and stability. Turbulent times are likely to strengthen the value of the yen against other currencies that are considered riskier to invest in.
