Euro trims gains against the Japanese Yen but maintains a near-term bullish trend

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The Euro (EUR) pulls back from intra-week highs just above 185.60 against the Japanese Yen (JPY) on Wednesday but maintains its immediate bullish bias, trading 0.5% higher on the week so far.

EUR/JPY eases from intra-week highs above 185.60 but remains 0.5% up in the week so far.
Investors' doubts about the implementation of Tokyo's plan to repatriate pension funds' investments are weighing on the Yen.
ECB's Kicher affirmed that the bank is ready to act against inflation at any moment.

The Euro (EUR) pulls back from intra-week highs just above 185.60 against the Japanese Yen (JPY) on Wednesday but maintains its immediate bullish bias, trading 0.5% higher on the week so far. Doubts about Tokyo’s plan to reallocate investment from pension funds continue to weigh on the JPY, while the Euro is holding up well amid rising geopolitical tensions.

The Yen has been on its back foot since a Reuters report earlier this week stated that the Japanese Finance Ministry has no immediate plans to repatriate pension fund investments, including those of the massive Government Pension Investment Fund (GPIF).

Japan’s Finance Minister Satsuki Katayama boosted a significant Yen recovery last Friday, announcing that the government would encourage Japanese pension funds to reinvest in domestic assets, bringing billions of US Dollars back to Japan. The Reuters report, however, suggests that this process might take months, if not years, which has encouraged speculative traders to resume their Yen shorts.

The Euro, on the other hand, is showing resilience amid developments in the Middle East and higher oil prices so far. US continued bombing military targets in Iran, and US President Donald Trump threatened to attack civilian infrastructure, such as bridges and Power plants. Tehran, in turn, has threatened to close other key energy routes, and Oil prices have consolidated close to one-month highs.

In Europe, Austrian Central Bank Governor and European Central Bank (ECB) official Martin Kocher affirmed in an interview that there are no signs of second-round inflationary effects in the Eurozone’s economy, but that the bank is ready to “take necessary steps to achieve 2% inflation target". The impact of these comments on the Euro, however, has been minimal.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

How do the decisions of the Bank of Japan impact the Japanese Yen?

One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.

How does broader risk sentiment impact the Japanese Yen?

The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.