EUR/JPY hits record highs above 185.50 due to Japan fiscal concerns

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EUR/JPY extends its winning streak for the fourth successive session and reaches fresh all-time highs, trading around 185.40 during the early European hours on Wednesday.

EUR/JPY rises as the Japanese Yen weakens amid growing fiscal and monetary policy concerns in Japan.
BoJ’s Ueda said rate hikes remain possible if economic conditions, wages, and prices rise in line with forecasts.
The Euro gains support as signs suggest the ECB is nearing the end of its rate-cutting cycle.

EUR/JPY extends its winning streak for the fourth successive session and reaches fresh all-time highs, trading around 185.40 during the early European hours on Wednesday. The currency cross appreciates as the Japanese Yen (JPY) weakens amid mounting concerns over the country’s fiscal health and monetary policy concerns.

Bloomberg reported on Wednesday that Bank of Japan (BoJ) Governor Kazuo Ueda said he remains prepared to raise interest rates if economic and price developments align with forecasts and wages and prices continue to rise moderately.

However, a private survey showed manufacturing activity slowing due to trade frictions, while tourism-related disruptions are weighing on services, constraining the Bank of Japan’s scope for rate hikes.

The JPY remains under pressure amid speculation that Japanese Prime Minister Sanae Takaichi may call a snap election next month to consolidate power and push expansionary fiscal policies, with reports suggesting a Lower House election on February 8.

Finance Minister Satsuki Katayama said earlier this week that she and US Treasury Secretary Scott Bessent voiced concern over the yen’s “one-sided depreciation” during a bilateral meeting held on the sidelines of a multilateral finance ministers’ gathering.

The EUR/JPY cross may further advance as the Euro (EUR) gains support from signs that the European Central Bank (ECB) is nearing the end of its rate-cutting cycle amid easing inflation. Eurozone headline inflation slowed to 2.0% in December, a four-month low and in line with the ECB’s target, while core inflation eased to 2.3%, coming in slightly below forecasts.

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.