EUR/JPY edges lower to near 185.50 after Japan’s ruling LDP landslide victory

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The EUR/JPY cross loses traction to near 185.55 during the early European session on Monday. The Japanese Yen (JPY) strengthens against the Euro (EUR) after Japan’s ruling Liberal Democratic Party (LDP) won an outright majority in Sunday’s lower house election.

EUR/JPY weakens to around 185.55 in Monday’s early European session.
Japan's ruling LDP won an outright majority in Sunday's lower house election.
ECB reiterated that it will stick to its data-dependent approach in determining its future monetary policy decisions.

The coalition led by Japanese Prime Minister Sanae Takaichi’s Liberal Democratic Party (LDP) secured a two-thirds supermajority in parliamentary elections. The landslide victory gives it the highest proportion of representatives in the lower house of any party in post-war elections in Japan.

“The LDP’s larger than expected victory prompted yen weakness in early trading, but profit-taking is leading to some yen strength,” said Motonari Sakai, chief manager of forex and financial products trading at Mitsubishi UFJ Trust & Banking.

On the other hand, concern about Japan's high public debt levels could exert some selling pressure on the JPY and create a tailwind for the cross. Takaichi announced plans to temporarily cut the sales tax on food last month, raising concerns over how Japan will pay for her plans to ramp up defense and other spending.

The ECB has held its benchmark interest rate at 2.0% for the fifth meeting in a row last week, as widely expected. ECB’s Lagarde said during the press conference that the central bank would maintain its data-dependent and “meeting-by-meeting approach,” and would not be “precommitting to a particular rate path.” Around 85% of economists surveyed by Reuters in their January poll said the ECB would keep the interest rates steady over the rest of 2026.

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.