"The Japanese Yen is being influenced by many factors other than our monetary policy" - Bank of Japan Governor Kazuo Ueda.

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The Pound to Yen exchange rate is the biggest riser of the Sterling pairs for the year but could be turned on its head by month-end if the Bank of Japan (BoJ) surprises financial markets in calling time on its monetary stimulus next Friday, which would also risk creating volatility in GBP/USD too.

July's monetary policy decision is widely forecast to see the BoJ interest rate left at -0.1% with the Yield Curve Control program's parameters unchanged in enabling the 10-year yield to fluctuate between -0.5% and 0.5% but some reports suggest scope for a surprise from the bank next Friday.

"Speculation about a BoJ YCC tweak has been back since the strong wage data on 7 July," says Evelyne Gomez Liechti, a strategist at Mizuho.

"We think the BoJ will wait until later in the year to tweak policy," she adds.

Any change from the BoJ could see the Yen pare losses after becoming the biggest faller among major currencies for a third year running in 2023 with its largest declines in relation to the Swiss Franc and Pound, suggesting GBP/JPY might be among the most sensitive to the decision.

Above: Pound to Yen rate shown at 2-hour intervals alongside JPY/USD and GBP/USD.

"The Japanese Yen is being influenced by many factors other than our monetary policy including the monetary policy of these three banks," Governor Kazuo Ueda said at a European Central Bank conference in June. "We are monitoring the situation very carefully."

Economist expectations for no change in monetary policy were encouraged when Governor Ueda said this Tuesday that recent increases in inflation are not yet convincing enough for him to support a winding down of the various stimulus initiatives intended to generate a steady and sustained 2% inflation rate.

"Japan’s inflation trends are the strongest in the world, with little signs of easing, providing Japan with uber-low real rates. That’s been a boon for equities, but should also keep the market on alert for a BoJ surprise," says Mark McCormick, global head of FX strategy at TD Securities.

Japanese inflation rose to a high of 4.3% in January before falling back to 3.2% in May and 3.3% in June but BoJ policymakers have remained confident that this "cost-push inflation" and "supply shocks" will eventually dissipate of its own accord and without any need for a big recalibration of monetary policy.

BoJ policymakers did discuss changing "the treatment" of the Yield Curve Control program in the near future at the June meeting due to its high cost in the face of rising interest rates elsewhere and launched a formal review of its entire monetary policy framework back in April.

Above: Pound to Yen rate shown at daily intervals alongside JPY/USD and GBP/USD.