EUR/JPY trades with mild gains above 174.50 amid softer Japan Tokyo CPI data

POPULAR ARTICLES

EUR/JPY strengthens to near 174.80 in Friday’s early European session.
Slower-than-expected Tokyo CPI inflation prompted the expectations that the BoJ might delay rate hikes.
Escalating geopolitical tensions could boost the safe-haven flows, capping the JPY’s downside.

The EUR/JPY cross trades in positive territory around 174.80 during the early European session on Friday. The Japanese Yen (JPY) softens against the Euro (EUR) after a slight moderation of consumer inflation in Tokyo. The European Central Bank (ECB) policymakers are scheduled to speak later on Friday, including Piero Cipollone and José Luis Escrivá.

Data released by the Statistics Bureau of Japan on Friday showed that the headline Tokyo Consumer Price Index (CPI) rose 2.5% year-on-year in September, compared to 2.6% in the previous month. Meanwhile, Tokyo CPI ex Fresh Food climbed 2.5% YoY in August against 2.8% expected and unchanged from August. The Tokyo CPI ex Fresh Food, Energy rose 2.5% YoY in September, versus 3.0% prior.

The moderation in inflation complicates the case for further interest rate hikes by the Bank of Japan (BoJ), even though price growth remains above its 2% target. Adding to this, concerns over political uncertainty in Japan ahead of the Liberal Democratic Party (LDP) leadership election scheduled for October 4 could allow the Bank of Japan (BoJ) to delay raising interest rates, which could exert some selling pressure on the JPY.

On the other hand, persistent geopolitical tensions in Europe and the Middle East could weigh on the EUR due to Europe’s close economic and energy ties with Russia. This could also boost the safe-haven flows, benefiting currencies like the JPY.

On Thursday, Ukraine’s President Zelensky warned that Russian President Vladimir Putin "will keep driving the war forward wider and deeper" if he is not stopped. Russian aerial attacks have become larger and more frequent since Moscow scaled up its drone production at the start of the year. But while most of these assaults used to come at night, there have been more daytime threats in recent weeks.

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.