GBP/JPY attracts some buyers above 198.50 as Japan's election outcome casts doubt on BoJ's rate hike plans

GBP/JPY strengthens to near 198.75 in Monday’s early European session, adding 0.70% on the day.
Political uncertainty in Japan exerts some selling pressure on the JPY.
The hawkish comments from the BoE policymaker underpin the Pound Sterling.

The GBP/JPY cross gains momentum to around 198.75 during the early European session on Monday. The Japanese Yen (JPY) edges lower amid political uncertainty after Japan’s ruling Liberal Democratic Party (LDP) lost its majority at Sunday's national election.

Japan’s ruling coalition has lost its parliamentary majority at Sunday's national election, raising uncertainty about the next government’s makeup and the Bank of Japan's (BoJ) rate hike plan, weighing on the Japanese Yen (JPY). The BoJ interest rate decision on Thursday will be closely watched. Although Governor Ueda preemptively ruled out a rate hike for this meeting, markets expect a possible rate hike in December or January.

Nearly 86% of economists polled by Reuters anticipate the Japanese central bank to leave its rates unchanged at its October meeting on Thursday. Izumi Devalier, chief Japan economist at Bank of America, noted that while political uncertainty and instability could delay rate hikes, the BoJ cannot ignore sustained weakness in the JPY.

On the other hand, Bank of England (BoE) Monetary Policy Committee (MPC) member Catherine Mann, an outspoken hawk, said on Thursday, "It would be premature to cut rates if you have structural persistence in the relationship between wages and price formation.” The hawkish remarks from the BoE policymaker could provide some support to the Pound Sterling (GBP) in the near term.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

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.

How do the decisions of the Bank of Japan impact the Japanese Yen?

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.

How does the differential between Japanese and US bond yields impact the Japanese 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.

How does broader risk sentiment impact the Japanese Yen?

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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