British Pound gains as report of a BoJ bond-tapering pause weighs on the Japanese Yen

The British Pound (GBP) strengthens against the Japanese Yen (JPY) on Tuesday as easing tensions in the Middle East support risk-sensitive assets, while the Japanese Yen comes under pressure after Reuters reported that the Bank of Japan (BoJ) is considering pausing its bond-tapering program.

At the time of writing, GBP/JPY is trading around 214.72, recovering after falling to a three-week low near 213.00 on Monday.

The report suggested that the BoJ could maintain government bond purchases at the current pace of 2.1 trillion Yen ($13 billion) per month beyond the next fiscal year, effectively pausing the planned reduction in bond buying under its quantitative tightening program. Following the news, Japan's 10-year government bond yield fell 5 basis points (bps) to 2.66%, adding to pressure on the Yen.

On the monetary policy front, traders are fully pricing in a 25 bps rate hike at next week's BoJ monetary policy meeting. However, the Yen has struggled to draw support from those expectations as elevated Oil prices continue to weigh on the outlook for Japan's import-dependent economy.

At the same time, the surge in Oil prices has increased upside inflation risks globally, raising the likelihood that major central banks may need to raise interest rates.

Such a scenario could further widen the interest rate gap between Japan and other major economies, leaving the Yen on the defensive against its peers as the BoJ continues to normalize monetary policy at a gradual pace.

Nevertheless, with USD/JPY trading back above the 160.00 level, the threat of another intervention by Japanese authorities remains on the table, keeping traders cautious about building aggressive bearish positions against the Yen.