EUR/JPY recovers above 183.50 on Japan's fiscal worries

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The EUR/JPY cross recovers some lost ground to near 183.55 during the early European session on Tuesday. The Japanese Yen (JPY) softens against the Euro (EUR) amid concerns about Japan’s fiscal health. The Bank of Japan (BoJ) Monetary Policy Meeting Minutes will be published later on Wednesday.

EUR/JPY rebounds to around 183.55 in Tuesday’s early European session.
Concerns about Japan's fiscal health could weigh on the Japanese Yen.
Speculation over a potential intervention by Japanese authorities might help limit the JPY’s losses.

Japan is preparing for an election on February 8, with Prime Minister Sanae Takaichi's vow to lower food tariffs causing shockwaves in the Japanese debt market in recent days. She said on Monday that she hopes to achieve a two-year suspension of 8% tax on food at the earliest date possible and submit relevant legislation in the fiscal 2026 diet.

Traders remain concerned about Japan's fiscal health on the back of Takaichi's aggressive spending and tax cut plans, which could weigh on the Japanese Yen and create a tailwind for the cross.

On the other hand, traders remain on alert to the prospect of a coordinated currency intervention by authorities in the United States (US) and Japan. This, in turn, could provide some support to the JPY against the EUR. Takaichi stated on Sunday that the government will take necessary steps against speculative and abnormal market moves. Nonetheless, she didn’t specify which market her remarks were referring to.

Meanwhile, Japan's Chief Cabinet Secretary Seiji Kihara said on Monday that he will take appropriate action on foreign exchange according to the Japan-US joint statement.

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.