EUR/JPY falls below 183.00 as Japanese Yen strengthens on optimism

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EUR/JPY extends its losses for the third successive session, trading around 182.80 during the Asian hours on Wednesday.

EUR/JPY falls as stronger JPY follows Japanese Prime Minister Takaichi’s historic LDP landslide victory.
The JPY gained support on speculation that Japanese authorities may intervene to curb excessive currency weakness.
The Euro could gain support as the ECB stays on hold amid resilient growth.

EUR/JPY extends its losses for the third successive session, trading around 182.80 during the Asian hours on Wednesday. The currency cross remains subdued as the Japanese Yen (JPY) strengthens on optimism following Japanese Prime Minister Sanae Takaichi's lead of the ruling Liberal Democratic Party (LDP) to a historic landslide victory. Takaichi’s policy agenda may boost economic growth and provide the Bank of Japan with more room to raise interest rates.

The JPY also drew support from speculation that Japanese authorities may intervene to curb excessive currency weakness. Meanwhile, a softer US Dollar (USD), pressured by weaker US economic data that reinforced expectations of Federal Reserve rate cuts, further boosted the Yen.

The downside in EUR/JPY may be limited as the Euro (EUR) finds support from the European Central Bank (ECB), which has stayed on hold since ending its year-long easing cycle in June last year, with resilient growth reducing the need for further policy support.

Danske Bank analysts also point to the newly finalized EU–India trade agreement, which will eliminate tariffs on more than 90% of traded goods within seven years. Although India currently accounts for just 1.5% of the Euro area's exports, it is projected to grow around 6.5% annually through 2030. The agreement significantly reduces car tariffs from 110% to as low as 10% and removes duties on auto parts.

Bank of Japan FAQs

What is the Bank of Japan?

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

What has been the Bank of Japan’s policy?

The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.

Why did the Bank of Japan decide to start unwinding its ultra-loose policy?

A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.