EUR/JPY edges higher to near 180.50 on fiscal concerns and BoJ doubts

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The EUR/JPY cross gains traction near 180.40 during the Asian trading hours on Monday. The Japanese Yen (JPY) softens against the Euro (EUR) amid fiscal concerns and the Bank of Japan (BoJ) rate hike uncertainty. Nonetheless, intervention fears might cap the downside for the JPY.

EUR/JPY strengthens to around 180.40 in Monday’s Asian session.
Fiscal concerns and BoJ rate hike doubts exert some selling pressure on the Japanese Yen.
Some verbal intervention from Japanese officials might help limit the JPY’s losses.

Reuters reported on Friday that Japan’s Prime Minister Sanae Takaichi approved a 21.3 trillion yen ($135.4 billion) economic stimulus package. The package contains 17.7 trillion yen in general account outlays, which exceeds the previous year's 13.9 trillion yen and represents the largest stimulus since the COVID pandemic. It will also include tax cuts totaling 2.7 trillion yen.

These measures raise concerns over Japan’s worsening fiscal health. Additionally, Takaichi’s administration also backed keeping interest rates low, which undermines the JPY and acts as a tailwind for the cross.

The European Central Bank’s (ECB) cautious tone lifts the Euro against the JPY. ECB President Christine Lagarde said on Friday that the central bank will remain vigilant to inflation risks and will adjust interest rates, if needed, to keep inflation at the 2% target. Meanwhile, the ECB Governing Council member Gabriel Makhlouf said on Thursday that the current monetary policy is appropriate and any adjustment is unlikely, unless there is a material change.

On the other hand, verbal intervention from Japanese officials could support the JPY in the near term. Finance Minister Satsuki Katayama said that Japan sees intervention in the foreign exchange market as a possibility in dealing with excessively volatile and speculative moves in the JPY.

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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