EUR/JPY returns above 185.00 on Euro strength, sell Japan trade

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EUR/JPY rallies beyond 185.00 after bouncing from 182.69 on Monday.
The Yen remains on its back foot amid growing concerns about Japan's public finances.
The Euro rallies across the board, boosted by the US Dollar's weakness.

The Euro is trading higher for the second consecutive day against a weaker Japanese Yen, reaching levels above 185.10 in the early European session on Tuesday, after bouncing from Monday’s lows of 182.69. The pair is drawing support from the US Dollar’s depreciation following US President Trump’s latest tariff bout, while the Yen remains on the defensive amid renewed fiscal fears.

The Japanese Prime Minister, Sanae Takaichi, rattled markets on Monday by announcing snap elections for February 8. The Yen went into a tailspin as investors feared that Takaichi’s higher popularity might give her greater parliamentary support to deepen her big-spending and accommodative monetary policies.

Japan's public debt in focus

On Monday, Takaichi announced a two-year exemption from the 8% Consumption Tax, which caught the attention of investors already wary about the country’s public debt and the looming risks of a fiscal crisis.
Long-term Japanese Government Bonds (JGBs) have rallied higher. The yield of the 40-year bond has risen about 35 basis points to hit fresh record highs above 4.2% on Tuesday after a 20-year bond’s auction closed with weak demand.

The Euro (EUR), on the other hand, is trading higher across the board. Neither the potential consequences of the additional tariffs announced by Trump nor the deflationary trends shown by the German Producer Prices Index have been able to dent the Euro recovery, which is showing the strongest performance among major currencies so far this week.

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.