• GBP/JPY lept more than 200 pips on Tuesday from the low 165.00s to the mid-167.00s as the yen battering continued.
• The yen remains highly vulnerable to rising global yields so long as the BoJ maintains its ultra-dovish stance.

GBP/JPY lept more than 200 pips on Tuesday from the low 165.00s to the mid-167.00s, as a broad sell-off in the yen as a result of rising global bond yields (excluding in Japan) deepened. At current levels in the 167.30s, the pair is trading with on-the-day gains of about 1.3% and is trading at its highest since February 2016.

Commentary from BoJ officials this week suggests a shift away from the bank’s flagship negative interest rate and yield curve control (YCC) policies remain premature to think about, hence the relentless yen sell-off. Given that the Japanese 10-year yield is capped in the 0.25% area (where it currently trades), the yen is vulnerable from a rate-differential perspective to rising yields in the US, UK, Eurozone and in other developed markets.

Given that politicians in Japan do seem to be getting increasingly nervous about the impact of yen weakness, the BoJ’s tolerance for a weaker yen is not without limit. Some have speculated that if the current sell-off continues, they might tweak either their rate guidance or YCC. At current levels, yen weakness has not gone far enough to trigger such a shift.

That suggests that, for now, the yen bears have a green light to continue shorting. At 168.00 is a low from late 2014 that could provide some resistance. The next key area of support turned resistance is at 175.00 (the 2015 low and a February 2016 high). That’s a further nearly 5.0% rally from current levels – such a move might be enough to spur some policy movement from the BoJ.