GBP Edges Higher vs JPY as Inflation Risks Weigh on Japan

The British Pound (GBP) edged higher against the Japanese Yen (JPY) on Tuesday, but the move lacked conviction and remained within a familiar range. The GBP/JPY cross currently trades around mid-216.00s, with the JPY weakening broadly.

Japan's benchmark 10-year bond yield hit 3% for the first time since September 1996 due to inflation risks stemming from higher energy prices and pressure on the Bank of Japan (BoJ) to hike interest rates faster. This would increase the cost of servicing Japan's massive debt pile, particularly with Prime Minister Sanae Takaichi planning aggressive investment.

Analysts at Rabobank highlight a fresh source of policy friction after US Treasury Secretary Scott Bessent appeared to nudge the BoJ toward faster tightening. Bessent said he was not going to tell the BoJ what to do, but suggested that 'the reflationary policies of Abenomics have run their course' and that 'coordinated intervention in FX markets could only go so far.'

The carry trade remains active due to borrowing costs in Japan being significantly lower than in other major economies, including the UK. The Bank of England (BoE) has maintained its benchmark rate at 3.75%, leaving a sizeable difference of over 250 basis points compared to the BoJ's short-term policy rate of 1.00%.

However, a pickup in US Dollar demand is exerting pressure on the British Pound and holding back bulls from placing aggressive bets. Traders now look to the release of the final UK Manufacturing PMI, though BoE Governor Andrew Bailey's speech on Friday should provide some meaningful impetus to the GBP/JPY cross.