GBP/JPY attracts some sellers near 188.00 as BoJ official signals more rate hikes

• GBP/JPY weakens around 188.15 in Thursday’s early European session, down 0.45% on the day. 
• The BoJ official leaves the door open for further interest-rate hikes, lifting the Japanese Yen.
• The upbeat UK Services PMI might help limit GBP’s losses. 

The GBP/JPY cross trades in negative territory for the third consecutive day near 188.15 during the early European session on Thursday. The Japanese Yen (JPY) strengthens as Japan’s rising real wages report reinforces market expectations for further hikes in borrowing costs.

Data released by the Ministry of Health, Labor and Welfare showed on Thursday that Japan’s Labor Cash Earnings climbed by 3.6% YoY in July, compared with a rise of 4.5% in June, beating the estimation of 3.1%. This upbeat reading has prompted speculation that the Bank of Japan (BoJ) would implement another interest rate hike before the end of 2024.

The BoJ board member Hajime Takata said on Thursday, “If the economy and prices move in line with our forecast, we will adjust policy rates in several stages.” Takata further stated that the Japanese economy recovered moderately, although some weak signs were seen. 

On the other hand, interest rate cut expectations by the Bank of England (BoE) weigh on the Pound Sterling (GBP) against the JPY. According to money market pricing data, the BoE is expected to cut interest rates once more this year, leaving borrowing costs at 4.75%. However, the publication of the UK’s latest services PMI might support the GBP and cap the downside for the cross. S&P Global showed that the UK Services PMI for August accelerated at its fastest pace since April.

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 current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

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 supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.

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.