GBP/JPY range-bound as BoE strikes dovish tone, BoJ remains cautious on inflation

The British Pound (GBP) weakens slightly against the Japanese Yen (JPY) on Tuesday, with the GBP/JPY pair hovering near 197.30 during the American session. In the absence of UK macroeconomic releases, the Sterling remains adrift, guided largely by central bank commentary and broader market sentiment. Meanwhile, the Japanese Yen finds modest support from an upbeat Tankan business survey and a steady consumer confidence index, although gains are capped by a softer Jibun Bank Manufacturing PMI, which underscores lingering weakness in Japan’s industrial sector.

Speaking at the ECB Forum in Sintra, Portugal, Bank of England (BoE) Governor Andrew Bailey struck a more dovish tone, suggesting that the path of interest rates is now “gradually downwards.” Bailey acknowledged early signs of labor market softening and emphasized that current uncertainty lies more with economic activity than inflation. He noted that businesses are delaying investment amid persistent economic ambiguity, while also underscoring the need for structural reforms to boost UK productivity. On policy implementation, Bailey flagged that the pace of quantitative tightening (QT) and potential yield curve steepening remain active considerations, reinforcing the BoE’s cautious and gradual approach.

Bank of Japan (BoJ) Governor Kazuo Ueda, also speaking at the Sintra forum, maintained a measured stance on inflation. While headline inflation in Japan has remained above the BoJ’s 2% target for over three years—largely driven by food prices—Ueda noted that underlying inflation remains “somewhat below” the target. He explained that Japan’s inflation dynamics are shaped by three forces: strong domestic demand and wages, cyclical pressures such as US tariffs, and supply shocks, particularly those tied to food costs.

Earlier in the day, Japan's economic data pointed to a slow but steady recovery. The Jibun Bank Manufacturing Purchasing Managers Index (PMI) rose to 50.1 in June, indicating the first expansion in 13 months, supported by stronger factory output and continued job creation. However, underlying demand remained fragile, with both new domestic orders and export sales declining again in June, pressured in part by newly imposed US trade tariffs. Separately, the BoJ’s Tankan survey showed improved sentiment among large manufacturers, with the index rising to 13 in Q2, up from 12 previously and well above expectations of 10.