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Pound Japanese Yen (GBP/JPY) Exchange Rate Rallies as Japan Enters ‘Full Blown Recession’

May 18, 2020 - Written by John Cameron

Pound Sterling Japanese Yen (GBP/JPY) Exchange Rate Rises as Japan Falls into a Recession

The Pound Sterling Japanese Yen (GBP/JPY) exchange rate rallied by around 1% this afternoon, leaving the pairing trading at around ¥130.9350.

The Japanese Yen slumped today after Japan’s economy slipped into recession for the first time in four and a half years.

The contraction in the first quarter of 2020 put the country on course for its worst post-war slump as the coronavirus caused chaos amongst businesses and consumers.

GDP slumped by -0.9% in the first quarter, following a downwardly revised contraction of -1.9%, which underlined the extent of the coronavirus outbreak.

Japan’s exports declining by the most since the catastrophic March 2011 earthquake as lockdowns across the world and supply chain disruptions hit shipments of goods.

Analysts are warning of an even bleaker picture for the current quarter, as consumption plummeted after the government ordered citizens to stay at home and businesses to close in April.

According to Yuichi Kodama, chief economist at Meiji Yasuda Research Institute:

‘It’s near certainty the economy suffered an even deeper decline in the current quarter. Japan has entered a full-blown recession.’

Sterling (GBP) Rises despite BoE and Brexit Woes

While Sterling was able to rise against the weakened Japanese Yen, the currency hovered near two-month lows against both the US Dollar (USD) and Euro (EUR).

Talk of the Bank of England (BoE) sending interest rates into negative territory weighed on Sterling, although GBP was able to make gains due to a weak Yen.

In an interview with the Telegraph, the BoE’s chief economist, Andy Haldane did not rule out the bank opting for negative rates to help support the economy.

This followed earlier comments from BoE Governor, Andrew Bailey who stated the bank was not thinking about sending rates into negative territory, but did not altogether rule this out.

Added to this, GBP remained under pressure due to Brexit pessimism as traders worried about a stalemate in Brexit negotiations with the European Union.

This increased the chances that Britain will be unable to strike a deal with the EU on the UK’s formal departure from the bloc at the end of December.

According to FX and global macro strategist at Arkera, Viraj Patel:

‘We’ve seen sentiment around Sterling flip from positive to negative in recent weeks as investors shift focus to local idiosyncratic risks.

‘Talk of negative rates in the UK (with markets slowly pricing in this reality) – as well as the renewed threat of a ‘No Deal’ Brexit once the transition period ends this year – are materially weighing on the Pound.’

Pound Yen Outlook: Will Industrial Production Send JPY Lower?

Looking ahead, the Japanese Yen (JPY) could extend its losses against the Pound (GBP) following the release of Japan’s industrial production data.

If March’s industrial production plummets further than expected as the coronavirus crisis hits, the Yen will slump further.

Meanwhile, Sterling could suffer some losses following the release of Britain’s unemployment data.

If unemployment rises higher than expected in March, while April’s claimant count change jumps due to the coronavirus pandemic, the Pound Japanese Yen (GBP/JPY) exchange rate will remain flat.

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