GBP/JPY hovers around 199.00 after LDP-coalition losing parliamentary majority

GBP/JPY may struggle as the Japanese PM Ishiba is expected to remain in office despite the ruling LDP-coalition losing majority.
The JPY may face challenges as Japan’s opposition is expected to advocate for increased government spending and tax cuts.
The GBP edges higher amid reduced likelihood of multiple interest rate cuts by the BoE in 2025.

Akhtar Faruqui FXStreet

GBP/JPY appreciates after opening with a gap down, trading around 198.90 during the European hours on Monday. However, the currency cross may face challenges as the Japanese Yen (JPY) holds ground as the Japanese Prime Minister (PM) Shigeru Ishiba is expected to remain in office despite the ruling Liberal Democratic Party (LDP) coalition losing its majority in the upper house election, as expected. This has probably eased concerns of a more severe political shakeup or potential resignation.

However, the JPY may face challenges as the opposition is likely to push for expanded government spending and tax cuts, which could drive Japanese Government Bond (JGB) yields to multi-year highs. However, Ishiba mentioned that the opposition’s proposal to cut taxes would take too long, and needs quicker action to help struggling households.

Japanese Prime Minister Ishiba on Monday apologized to the ruling Liberal Democratic Party (LDP) for the election loss, adding that he will continue to govern in coalition with Komeito. Ishiba also highlighted that the most important thing for Japan is political stability, as it faces several challenges.

On a trade deal with the United States (US), Ishiba reiterated to reach a deal with the US on tariffs while protecting national interests. He stated that he wants to speak with President Trump at the earliest date possible to seek a solution on trade.

The GBP/JPY cross gains ground as the Pound Sterling (GBP) edges higher, driven by the diminished likelihood of multiple interest rate cuts by the Bank of England (BoE) in 2025.

A Reuters report suggested that several Wall Street brokers have revised their BoE rate cut expectations after June's UK Consumer Price Index (CPI) came in hotter than anticipated and labor market data for the three months ending in May showed less weakness than expected.

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.

Author

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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