Euro hits fresh monthly highs with Japanese Yen weakness raising intervention concerns

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The Euro (EUR) extends its rally against the Japanese Yen (JPY) for the fourth consecutive day on Wednesday, reaching above 185.46 for the first time since an alleged intervention on April 30.

EUR/JPY rallies for the fourth consecutive day and hits fresh monthly highs above 185.46.
BoJ Ueda's comments backing an upcoming rate hike have failed to support the Yen.
In Europe, ECB policymakers have endorsed hopes of a tightening move in June.

The Euro (EUR) extends its rally against the Japanese Yen (JPY) for the fourth consecutive day on Wednesday, reaching above 185.46 for the first time since an alleged intervention on April 30. The JPY has failed to draw support from Bank of Japan Governor (BoJ) Ueda’s hawkish comments and is dropping against its main peers, raising concerns of another intervention.

Ueda warned about second-round effects from inflation on Wednesday and stated that central banks should not look at Oil prices in isolation, because a temporary energy shock “may turn lasting if it alters wages, expectations and price-setting behaviour.”

These comments feed expectations that the BoJ will tighten its monetary policy at its June 15 meeting. The positive impact on the Yen, however, was minimal, with investors’ concerns about the Japanese economy’s exposure to high Crude prices and the comparatively low yield of Japanese Government Bonds (JGB) undermining speculative demand for the Yen.

In the Eurozone, recent comments from European Central Bank (ECB) policymakers strengthened the case for a rate hike in June and provided support for the Euro. ECB Board member Isabel Schnabel said on Tuesday that “looking through the inflation spike is no longer an option” and that a June rate will be needed. Also on Tuesday, ECB Chief Economist Philip Lane showed comfortable when asked about market speculation about an upcoming rate hike at an interview with Nikkei.

Bank of Japan FAQs

What is the Bank of Japan?

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

What has been the Bank of Japan’s policy?

The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.

Why did the Bank of Japan decide to start unwinding its ultra-loose policy?

A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.