The British pound (GBP) fell against the Japanese yen (JPY) on Tuesday, with GBP/JPY paring part of the previous day’s gains amid calmer market conditions. At the time of writing, the pair is trading around the 211.45 area after briefly rising above the psychological 212.00 level earlier in the Asian session.
The economic calendar is light on both sides on Tuesday. In the UK, weak Purchasing Managers’ Index (PMI) data added mild pressure on sterling after final S&P Global figures showed the composite PMI falling to 51.4 in December from 52.1 in November. The Services PMI came in at 51.4, down from 52.1.
Tim Moore, director of economics at S&P Global Market Intelligence, said weak growth in UK services sector activity continued until the end of 2025, although the pace of expansion was weaker than previous flash estimates for December indicated. He also noted that inflationary pressures across the services economy strengthened, with input costs rising at the fastest pace in seven months and excise duty inflation rebounding from November lows, despite the weak demand environment.
For the Bank of England, weak activity supports a more cautious growth outlook, but flat services inflation suggests policymakers may remain reluctant to ease policy too quickly. This fits with guidance from the December meeting, where officials indicated that interest rates were likely to continue on a gradual downward path.
By contrast, the Bank of Japan is moving on a hawkish path toward policy normalization, with market expectations building around 50 basis points of interest rate hikes through 2026.
However, the broader GBP/JPY bias remains to the upside, as investors continue to favor the pound over the yen amid the still wide interest rate differential between the UK and Japan.
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.
