EUR/JPY strengthens above 176.50 on ECB’s cautious stance

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The EUR/JPY cross gains traction to around 176.55 during the early European session on Wednesday. The Euro (EUR) strengthens against the Japanese Yen (JPY) as traders expect the European Central Bank (ECB) to adopt a cautious stance in its upcoming policy meeting.

EUR/JPY trades in positive territory near 176.55 in Wednesday’s early European session.
ECB policymakers signalled that the central bank would adopt a data-dependent policy.
Japan’s Katayama said authorities are closely monitoring FX volatility and cautioning against sharp, one-sided moves.

The ECB left its deposit rate unchanged at 2.0% for a third meeting last week. The central bank noted that the inflation outlook remains broadly stable, the economy continues to grow, and uncertainty persists. ECB President Christine Lagarde highlighted that the central bank is “in a good place” and further stated it will do whatever is needed to stay in such a favorable position.

Meanwhile, ECB Governing Council member Joachim Nagel said on Monday that Eurozone economic data aren’t diverging from the ECB’s outlook, but policymakers are keeping their options open. ECB policymaker Francois Villeroy de Galhau noted that the central bank is in a good position after the October policy decision.

On the other hand, verbal intervention from Japanese officials could provide some support to the JPY and act as a headwind for the cross. Japan’s Finance Minister Satsuki Katayama said on Friday that it was “important for currencies to move in a stable manner, reflecting fundamentals.” He further added that the government was “closely watching FX moves with a high sense of urgency.”

The Bank of Japan (BoJ) minutes from its September meeting indicated rising support for another interest rate hike, though some members remain cautious due to Japan's long history with deflation. The JPY edges slightly higher after the release of the hawkish BoJ minutes.

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.