EUR/JPY returns above 185.00, Yen weakens ahead of Japan’s elections

Takaichi is likely to obtain a landslidevictory

Takaichi is enjoying increasing popularity, and the latest polls are clearly favourable. A local newspaper reported that the ruling Liberal Democratic Party (LDP) and its coalition partner could secure as many as 300 of the 465 seats in the Japanese Lower House, a result that might allow Takaichi to rule without coalition restrictions, a scenario that spooks markets.

In Europe, data from Germany has been far from supportive on Friday, as December’s Industrial Production contracted well beyond expectations. The Euro, however, maintains a mild bullish tone supported by the hawkishly leaning message by the European Central Bank (ECB) on Thursday.

The ECB left interest rates on hold at 2% but also maintained its inflation projections steady and unchanged, downplaying concerns about the deflationary effects of a strong Euro. Christine Lagarde reiterated that monetary policy is in a “good place” and hinted at steady interest rates for the foreseeable future.

(This story was corrected on February 06 at 13:10 GMT to say that the Liberal Democratic Party (LDP) and its coalition partner could secure as many as 300 of the 465 seats in the Japanese Lower House, and not that the Liberal Democratic Party (LDP) could secure as many as 300 of the 450 seats as previously stated.)

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.