The currency pairing of the British pound (GBP) and the Japanese yen (JPY) has piqued the interest of risk-accommodating forex traders and investors for decades. Nicknamed "the dragon," the GBP/JPY is known for its inherent volatility and periodic wide trading ranges. In addition, the GBP/JPY is seen as a barometer of global economic health as it relates issues facing Western Europe's monetary policies with those of the Asia-Pacific region.
Both the British pound and the Japanese yen exist as "major" global currencies. The designation of "major" signifies that the pound and yen trade frequently, with enough volume to earn them a rank among the top eight global currencies. The yen is ranked third and accounts for 19% of forex trading volume, while the pound is a notch below in fourth, involved in 12.9% of forex volume.
As a pairing, the GBP/JPY is considered to be a "cross." The label of "cross" refers to the fact that the United States dollar (USD) is not used in calculating the exchange rate. For instance, as of this writing (July 2016), the GBP/JPY has a value in the neighborhood of 140.00. This means it will take 140 Japanese yen to purchase one British pound, or £1=¥140. The conversion is made directly, without first being denominated in U.S. dollars.
Governments And Central Banking Authorities
Two primary drivers of the GBP/JPY exchange rate are governmental and monetary policy. Each has the power to rapidly influence the money supply in Japan, the United Kingdom, or both. If monetary stocks exceed demand, the domestic currency is likely to react in a bearish fashion; if supply lags demand, bullish price action is probable.
Upon the announcement of important Japan/U.K. policy changes, the GBP and JPY are likely to be influenced in real-time. For the GBP/JPY pairing and related CFDs, the following policymakers play key roles in establishing exchange-rate stability:
Elections, Parliamentary votes and public referendums can all spark trends in the GBP. Premier examples of how the U.K. government can influence the GBP may be found through examination of the Brexit transition process.
Since 2012, Prime Minister Shinzo Abe has promoted a policy of Abenomics to foster economic growth. Under Abenomics, the government lobbies for aggressively dovish monetary policy, fiscal consolidation and growth-oriented strategies. Abe is due to step down as P.M. in 2020.
Bank of England (BoE)
The BoE is the central banking authority for the U.K. It is commissioned with ensuring the stability of the GBP by adjusting interest rates and promoting liquidity in Britain's capital markets.
Bank of Japan (BoJ)
Like the BoE, the BoJ is tasked with managing the yen's stability. However, to accomplish this goal, a long-term policy of near-zero and negative interest rates has been instituted. Since 2000, the BoJ has set its policy rate between 0.5% and -0.10%. The goal of Japan's rock-bottom interest rates is to generate economic growth through developing a bullish export sector.
The novel coronavirus (COVID-19) pandemic of 2020 clearly illustrated how governments and central banks could influence the British pound and Japanese yen. In Japan, a sweeping US$1.1 trillion stimulus package was passed in May 2020 to combat economic fallout from COVID-19. To complement the stimulus, the BoJ offered support for corporate financing, purchased ETFs and injected vast quantities of yen and foreign currencies into the financial markets.
To combat coronavirus economic fallout, the British government took its own steps to mitigate the crisis. One of most well-known was a £30 billion stimulus package in August 2020. Also, the BoE instituted emergency policies such as cutting interest rates to near-zero, lending £190 billion to businesses and sustaining £435 billion in government bond purchases.
As expected, the extraordinary governmental and central banking policies greatly impacted the GBP and JPY price. Similar to the forex major pairings such as the GBP/USD, EUR/USD and USD/JPY, the GBP/JPY experienced an extended period of exchange rate volatility.
Examples Of GBP/JPY Volatility
The ability of the GBP/JPY to fluctuate dramatically is one of its most recognisable attributes. Because of this, active forex participants often rely on technical analysis to craft trading decisions in real-time. To deal with the volatility, many active traders turn to technical indicators and tools to place price action into a manageable context.
From a historical perspective, the global financial crisis of 2008 and the "Brexit" referendum of 2016 are solid illustrations of how far the GBP/JPY is capable of trending before correction.
For the period beginning in late 2007 and ending in early 2009, the pound exhibited the strain brought about by the global credit crunch. Accordingly, the valuation of the GBP/JPY reflected this weakness and experienced a prolonged downtrend. Over the course of the downtrend, the GBP/JPY traded from a high of 250.13 to a low of 121.21, representing a decline larger than 50% of value.
Albeit in the much shorter term, the result of the United Kingdom's decision to leave the European Union via the Brexit referendum also produced a severe downtrend in terms of the GBP/JPY. As the Brexit's result was digested by the marketplace during June 2016, the GBP/JPY traded from a high of 160.66 to a low of 133.31; a monthly return of -27.4%.
Japanese Yen's Relationship With Energy Pricing
A unique factor that impacts the valuation of the GBP/JPY is the relationship between the Japanese yen and energy pricing. Japan is heavily reliant upon the importation of crude oil and natural gas products as a means of satisfying domestic energy requirements. For the year end 2019, Japan ranked fourth globally in the importation of crude oil and second in natural gas imports. and first in liquified natural gas.
The pricing of energy commodities and the yen are intertwined, with one often dictating the other's subsequent value. Empirical evidence shows that in the event of a substantial global energy price increase or decrease, the valuation of the yen is likely to reflect the fluctuation to a various degree. Accordingly, the adjustment in the value of the yen directly influences the GBP/JPY.
In addition to energy pricing, several other key factors dictate the volatility facing the valuation of the GBP/JPY at a given time. Political atmospheres, domestic monetary policy and each country's aggregate economic output all play their roles in ensuring stability or producing chaotic trading conditions facing the GBP/JPY.
Past Performance: Past Performance is not an indicator of future results.
Key Facts GBP/JPY
British Pound Sterling (GBP)
- Currency overview: The British pound, also known as the "pound sterling" or simply as the "pound," is the fourth-most commonly traded currency on the forex market. In addition to being traded in high volumes, the pound is also the third-largest reserve currency in the world behind the United States dollar and the euro.
- Central bank: Bank of England
- Currency code: GBP
- History: The pound sterling is the world's oldest currency still in use. The first pound coinage dates back to the late 15th century, with the pound sterling's value being derived from one pound of silver. The pound sterling was originally divided into the subunits of 20 shillings, with each consisting of 12 silver pence. The system remained in use until 1971, when the pound underwent a process of decimalisation, which changed the subunit of one pound to 100 pence. The pound was pegged to the United States dollar during the WWII era, in accordance with the Bretton Woods monetary system. With the dissolution of Bretton Woods in 1971, the pound took its current form as a "floating currency."
- Economy: The UK is ranked number 10 globally in terms of GDP purchasing power parity, with a total output of US$2.66 trillion annually. The UK also ranks as the third-largest economy in Europe behind Germany and France. Key production industries that drive output are agriculture and energy production (coal, oil and natural gas). Service industries such as banking, insurance and other business services comprise a large part of GDP output.
- Currency subunits: One British pound consists of 100 "pence"
- Denominations: Bills: £5, £10, £20, £50; Coins: 1p, 2p, 5p, 10p, 20p, 50p, £1, £2, £5
- Countries and territories using the GBP: United Kingdom, Isle of Man, Channel Islands, South Georgia, South Sandwich Islands, British Antarctic Territory and Tristan da Cunha
- Currencies pegged to the GBP: Gibraltar pound, Falkland Islands pound and Saint Helena pound. All are separate, regional currencies pegged at parity with the GBP.
- The GBP/USD pairing is considered to a "major" currency pair. Other commonly traded pairings including the pound are with the Japanese yen (GBP/JPY), euro (EUR/GBP), Swiss franc (GBP/CHF) and the Australian dollar (GBP/AUD).
Japanese Yen (JPY)
- Currency overview: The Japanese yen is the most frequently traded currency in Asia, and trades with the third-highest volume globally. Yen valued at nearly US$1 trillion is currently in global circulation. This valuation ties the yen with the USD for second globally, behind the euro.
- Currency code: JPY
- Central bank: Bank of Japan
- History: The creation of the yen is credited to the Meiji Restoration period, dating back to the mid-19th century. The New Currency Act of 1871 centralised and created a uniform monetary system in Japan, similar to the European currency structures of the day. In 1882, the Bank of Japan was created. It became the Japanese central bank, and consolidated the 153 national banks of Japan. In 1949, as a result of WWII, the yen was pegged to the dollar on a 1:1 basis according to the new Bretton Woods monetary system. This exchange rate remained in place until 1971.
- Economy: The Japanese economy is largely export driven, thus the governmental practice of periodically devaluing the yen to favour the export sector has been prevalent in Japan dating back to the early 1990s. When measured in terms of GDP purchasing power parity (PPP), Japan ranks as the fourth largest economy in the world.
- Currency subunits: No subunits of yen exist.
- Denominations: Banknotes: ¥1000, ¥2000, ¥5000, ¥10000; Coins: ¥1, ¥5, ¥10, ¥50, ¥100, ¥500.
- The Japanese yen is the national currency of Japan, with no other countries exclusively pegging to or directly using the yen as their domestic currency.
- Currency pairings commonly associated with the yen are EUR/JPY and JPY/AUD. The yen is considered a "major" when paired with the USD (USD/JPY).
This article was last updated on 5th November 2020.
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…