EUR/JPY advances above 185.00 as fiscal expansion pressures Japanese Yen

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The EUR/JPY cross gathers strength to near 185.20 during the early European session on Thursday. The Japanese Yen (JPY) weakens against the Euro (EUR) amid fiscal expansion concerns. The German Industrial Production data for February is due later on Thursday.

EUR/JPY gains traction around 185.20 in Thursday’s early European session.
Fiscal expansion concerns weigh on the Japanese Yen.
ECB policymakers signaled a shift toward a potential further rate hike if price pressures persist.

Reuters reported on Thursday that the ceasefire deal appeared to be on thin ice, as Israel continued its parallel war against the Iran-aligned militia Hezbollah in Lebanon. Iranian officials stated that both Israel and the US had breached the terms of the ceasefire deal, adding that proceeding with peace talks would be “unreasonable.”

Traders anxiously assessed whether a fragile two-week ceasefire between the United States and ‌Iran would hold. "With the Middle East situation becoming more prolonged, there seems to be a view that fiscal policy could turn more expansionary again. That, in turn, is contributing to yen weakness," said Sho Suzuki, market analyst at Matsui Securities.

Markets anticipate a potential Bank of Japan (BoJ) rate hike at the upcoming April policy meeting, which could support the JPY and create a headwind for the cross. Tomohisa Fujiki of Citi Research indicated that there is up to a 70% probability of this monetary policy adjustment.

The European Central Bank (ECB) has adopted a hawkish tone, with policymakers signaling a shift toward potential further tightening if price pressures persist. ECB officials, including Pierre Wunsch and Dimitar Radev said that an interest rate hike at the April meeting is a live possibility, though many officials view a June move as more likely.

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.

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