The pound fell against the Japanese yen at the start of the week, as hawkish comments from Bank of Japan Governor Kazuo Ueda pushed the yen higher across the board. The GBP/JPY pair is trading near 205.25 at the time of writing, hitting a five-day low.
Bank of Japan Governor Kazuo Ueda indicated on Monday that policymakers will weigh the pros and cons of an interest rate increase at a monetary policy meeting in December. Ueda warned that delaying a rate hike for too long could cause severe inflation and force the central bank to make a rapid policy adjustment. He also noted that “I want to go into more detail on the path to future rate hikes once rates rise to 0.75%,” suggesting that clearer forward guidance will follow next.
He added that the central bank is closely monitoring wage trends and underlying demand conditions, noting that the Bank of Japan is “actively collecting” data on wage expectations ahead of its policy meeting in December.
Ueda also stressed that a combination of the government’s proactive fiscal policy and adjustment of monetary support from the Bank of Japan will help Japan move toward a more sustainable economic growth path.
Markets interpreted Ueda’s comments as a clear signal that a December rate hike is still on the table. According to a Reuters report, his comments led traders to estimate a roughly 80% chance of a rate hike at the December 18-19 meeting, a sharp rise from about 60% the week before.
The 10-year Japanese government bond yield also rose above 1.85% immediately after Ueda’s comments, hitting its highest level since July 2006.
On the UK side, local indicators are offering limited support to sterling, with the latest S&P Global survey showing the UK’s seasonally adjusted manufacturing PMI rising to a 14-month high of 50.2 in November from 49.7 in October, marking the first reading above the neutral 50 threshold since September 2024.
“The numbers are particularly encouraging as this improvement occurred despite November seeing high levels of business uncertainty, and in some cases an element of gloom, ahead of the Autumn Budget,” S&P Global’s Rob Dobson noted.
Looking ahead, traders will pay close attention to comments by Bank of England (BoE) policymaker Swati Dhingra later on Monday for signals ahead of the December 18 meeting. The focus then turns to the release of the Financial Stability Report and accompanying Financial Policy Committee meeting minutes on Tuesday.
Bank of Japan Frequently Asked Questions
The Bank of Japan (BoJ) is Japan’s central bank, which sets the country’s monetary policy. Its mission is to issue banknotes and implement currency and monetary controls to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan embarked on an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflation environment. The bank’s policy relies on quantitative and qualitative easing (QQE), or printing banknotes to purchase assets such as government bonds or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and eased its policy by first offering negative interest rates and then directly controlling the yields of its 10-year government bonds. In March 2024, the Bank of Japan raised interest rates, effectively reversing its ultra-loose monetary policy stance.
The massive incentives offered by the bank caused the value of the Japanese yen to decline against major currencies. This process was exacerbated in 2022 and 2023 by the growing policy divergence between the Bank of Japan and other major central banks, which chose to increase interest rates sharply to combat decades-long high levels of inflation. The Bank of Japan’s policy led to a widening of the spread with other currencies, which led to a decline in the value of the Japanese yen. This trend was partially reversed in 2024, when the Bank of Japan decided to abandon its overly accommodating policy stance.
The weakness of the Japanese yen and rising global energy prices led to an increase in Japanese inflation, which exceeded the Bank of Japan’s target of 2%. The prospect of higher salaries in the country – a key element fueling inflation – also contributed to the move.
