EUR/JPY strengthens to near 171.00 amid uncertainty about timing of BoJ's next rate hike

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The EUR/JPY cross gains momentum to near 171.00 during the Asian trading hours on Monday. The Japanese Yen (JPY) weakens against the Euro (EUR) amid reduced Bank of Japan (BoJ) rate hike expectations and political uncertainty in Japan.

EUR/JPY trades on a positive note around 171.00 in Monday’s Asian session.
BoJ’s Ueda said he will carefully consider rate hike timing.
The ECB is expected to delay its rate cuts this year.

BoJ Governor Kazuo Ueda last week left investors guessing about the timing of the BoJ's next interest rate hike with remarks that lowered expectations of a near-term move and depreciated the JPY. Ueda said that the Japanese central bank will carefully assess the timing of its next policy interest rate hike, as uncertainty over economic and price trends in Japan and overseas remains high. Additionally, domestic political instability after the ruling Liberal Democratic Party’s loss in the July 20 polls could complicate BoJ’s job further and might contribute to the JPY’s downside.

On the Euro’s front, the European Central Bank (ECB) is expected to delay its rate cuts this year as inflation is projected to remain above the ECB’s near-term forecasts. Furthermore, the upbeat GDP data from the Eurozone indicated that businesses are adapting to trade uncertainty. Traders will take more cues from the Eurozone Retail Sales data for June, which will be published later on Thursday.

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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