EUR/JPY edges lower below 181.50 as Japan unveils stimulus package

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EUR/JPY softens to near 181.40 in Friday’s early European session.
Japan’s cabinet approved 21.3 trillion yen economic stimulus package.
ECB’s Makhlouf said the current monetary policy is appropriate.

The EUR/JPY cross declines to around 181.40 during the early European session on Friday. The Japanese Yen (JPY) strengthens against the Euro (EUR) in the wake of Japan's Cabinet approving the 21.3 trillion yen economic stimulus package. Traders await the preliminary reading of HCOB Purchasing Managers Index (PMI) reports from the Eurozone, Germany, and France for fresh impetus.

Reuters reported on Friday that Japanese Prime Minister Sanae Takaichi's cabinet approved a 21.3 trillion yen ($135.40 billion) economic stimulus plan. This is the first significant policy initiative under the new leader, who has promised to pursue expansionary fiscal policies.

The package contains 17.7 trillion yen in general account outlays, which substantially exceeds the previous year's 13.9 trillion yen and represents the largest stimulus since the COVID epidemic. It will also include tax cuts totaling 2.7 trillion yen. The JPY edges slightly higher against the EUR in an immediate reaction to the report.

Nonetheless, fiscal concerns and the Bank of Japan (BoJ) rate hike uncertainty might cap the upside for the JPY and act as a tailwind for the cross. A narrow majority of economists expect the Japanese central bank to raise rates to 0.75% in December, with all forecasters seeing at least that level by the end of the first quarter (Q1), a Reuters poll showed on Thursday.

The cautious remarks from the European Central Bank (ECB) might also underpin the EUR. The ECB is widely anticipated to leave the key interest rates unchanged through the end of 2026, with inflation hovering near its 2% target, stable economic growth, and unemployment at record lows. ECB Governing Council Gabriel Makhlouf said on Thursday that the current monetary policy is appropriate and any adjustment is unlikely, unless there is a material change.

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.