Insights 
VT 
The GBP/JPY exchange rate rose to around 201.70 during Monday’s early European session. This increase comes after Japan’s Liberal Democratic Party elected Sanae Takaichi, who is on course to become the country’s first female Prime Minister.
A shift in market perception has influenced traders, with reduced expectations for a Bank of Japan rate hike in October. Overnight index swaps now show a nearly 25% chance of a rate increase, down from 60% before the leadership vote.
UK Labour Market Concerns
The UK labour market presents concerns that might limit the GBP/JPY’s rise. The Bank of England’s recent survey indicated firms’ expectations for employment growth remained flat, marking a first since November 2020.
The Bank of Japan has historically influenced the Yen’s value through its monetary policy. Policy divergence between Japan and the US primarily affects the Yen value, with a reduction in divergence since 2024 providing some support.
The Japanese Yen tends to appreciate during market stress due to its safe-haven status. This characteristic often leads to its strengthening against currencies perceived as riskier investments during turbulent times.
The victory of Sanae Takaichi in the LDP leadership election is causing significant weakness in the Japanese Yen. We see this as her policy stance is expected to oppose any further monetary tightening from the Bank of Japan. Consequently, the GBP/JPY cross has surged past 201.50, a level we have not seen since the summer of 2024.
Rate Hike Bets and Economic Indicators
In response, we have seen traders rapidly unwind bets on a Bank of Japan rate hike this month. Overnight index swaps show the probability of a 10-basis-point hike at the October 31st meeting has collapsed to below 25%, down from over 60% just last week. This repricing suggests options that profit from a weaker Yen, like long calls on GBP/JPY, are gaining popularity.
However, any further upside for the cross could be limited by growing concerns about the UK labor market. The most recent data from the Office for National Statistics, released on September 15th, showed the UK unemployment rate unexpectedly ticked up to 4.5%. This reinforces the view that the Bank of England will likely keep interest rates on hold for the remainder of 2025.
The current price action is reminiscent of the period in 2022-2023, where widening interest rate differentials were the primary driver of Yen weakness. The spread between the UK 10-year Gilt yield and the Japanese 10-year Government Bond has now expanded back to over 420 basis points. This differential makes holding Sterling more attractive than the Yen, supporting the cross.
As GBP/JPY approaches the key psychological resistance level of 202.00, we anticipate increased volatility. One-month implied volatility in the options market has risen to 9.8%, indicating that traders are positioning for larger price swings ahead of the formal parliamentary vote on October 15th. This suggests that strategies which can profit from significant price movement could be effective in the weeks ahead.
