The British Pound (GBP) has climbed against the Japanese Yen (JPY) for the fourth day in a row. This increase is due to the Yen’s weakness, especially after Sanae Takaichi won the leadership race in Japan’s ruling party. Currently, the GBP/JPY rate is about 204.65, reaching a new high for the year. This is its strongest point since mid-July 2024, showing a 3.0% rise this week.

Expected Changes in Monetary Policy

The Yen is under pressure because investors expect the Bank of Japan (BoJ) to slow down its monetary tightening. Initially, many anticipated strong actions during the BoJ’s meeting in late October. Now, the focus has shifted to a potential move in December. Recent reports indicate that Japan’s Labor Cash Earnings grew by only 1.5% year-on-year in August, missing the expected 4.1%. Additionally, real wages fell by 1.4% year-on-year, continuing a troubling trend for eight months. This is a challenge for the BoJ as it faces risks from rising imported inflation. If the Yen weakens against the US Dollar and approaches 152.00, there may be an intervention. Meanwhile, the Bank of England (BoE) is being careful, hinting at possible further tightening if inflation remains a problem. The current strength of GBP/JPY results from the increasing gap in policies between the Bank of England and the Bank of Japan. With Takaichi’s leadership in Japan, expectations for a BoJ rate hike have been delayed, likely until December. This change keeps the Yen weak and boosts the Pound’s value.

Economic Indicators and Strategies

This divergence is reflected in the latest economic data. The UK’s Consumer Price Index (CPI) for September was a steady 3.1%, putting pressure on the BoE to stay alert about inflation. In contrast, Japan’s wage data was surprisingly weak, making it hard for the BoJ to consider tightening its policies right now. In the coming weeks, buying GBP/JPY call options seems like a smart way to benefit from the anticipated upward movement. One-month implied volatility has risen above 12%, indicating that the market expects significant fluctuations around the late October BoJ meeting. This setup could lead to leveraged gains if the pair continues to rise toward the 206-208 range. The main risk to this strategy is potential intervention from Japanese officials, especially if USD/JPY exceeds the 152.00 mark. Additionally, recent CFTC data shows that speculative short positions on the Yen are at their highest since early 2024. A sudden reversal could lead to a significant short squeeze against this crowded trade. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now