**Concerns in Japan** Japan’s financial health continues to raise alarms as Prime Minister Sanae Takaichi unveils plans for spending and tax cuts, leading up to the elections on February 8. While these actions have weakened the yen, a generally positive market mood supports the GBP/JPY exchange rate. However, the Bank of Japan’s (BoJ) firm stance on monetary policy is keeping further yen declines in check. Recent minutes from the BoJ’s December meeting indicate a commitment to maintaining a wage-price cycle, leading to a less accommodating monetary policy. This contrasts with expectations of rate cuts from the Bank of England (BoE) by 2026. A strengthening US Dollar is also putting pressure on the British Pound (GBP), influencing its performance against the yen. The Pound Sterling is the oldest currency in the world, making up 12% of forex transactions. Key trading pairs include GBP/USD, GBP/JPY, and EUR/GBP. The BoE’s monetary policy plays a crucial role in determining the Pound’s value, with interest rate changes significantly impacting its strength. Additionally, economic indicators such as trade balance, exports, and inflation influence the currency’s performance. **Policy Divergence and Its Impact** Currently, the GBP/JPY exchange rate is tightly held below 211.00, reflecting a significant split in monetary policies between the central banks. The Bank of Japan is indicating potential rate hikes, while the Bank of England is expected to lower rates this year. This ongoing tug of war is preventing any decisive movement in the exchange rate. Market expectations for UK rate cuts are supported by the recent inflation report from December 2025, which showed the Consumer Price Index (CPI) at 2.1%. On the other hand, Japan is poised to tighten its policies due to strong wage growth, which reached a 30-year high of 5.5% during last year’s wage negotiations. This policy divergence is the key factor behind the current market uncertainty. The approaching snap election in Japan on February 8 adds to the instability, putting additional pressure on the yen. Fiscal spending plans and political uncertainty are hindering the yen’s strength, which is helping to prevent a larger drop in the GBP/JPY exchange rate. In light of these developments, derivative traders should approach outright directional bets with caution. Implied volatility for one-month GBP/JPY options has risen to 12.5%, indicating anxiety leading up to the election. This volatility suggests that strategies taking advantage of significant price swings, such as long straddles or strangles, could be viable. Alternatively, if you anticipate that the exchange rate will remain stable after the election, selling volatility with strategies like an iron condor could be appealing. Given the underlying policy divergence that may favor a stronger yen in the medium term, purchasing puts or employing bear put spreads could be a prudent strategy for anticipating a downward move. This is a cautious approach following the substantial increase seen throughout most of 2025. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now