EUR/JPY gathers strength above 181.00 on fiscal concerns and BoJ uncertainty

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The EUR/JPY cross extends the rally to around 181.20 during the Asian trading hours on Thursday.

EUR/JPY strengthens to bear 181.20 in Thursday’s Asian session.
Japan’s fiscal concerns and BoJ rate hike uncertainty weigh on the Japanese Yen, but intervention fears might cap its downside.
Markets expect the ECB to hold interest rates at least until the end of 2026.

The EUR/JPY cross extends the rally to around 181.20 during the Asian trading hours on Thursday. The Japanese Yen (JPY) weakens against the Euro (EUR) amid market expectations that Japan’s Prime Minister Sanae Takaichi’s new administration will deliver a huge spending package backed by low interest rates. The German Producer Price Index (PPI) and Eurozone Consumer Confidence reports will be published later on Thursday.

The Kyodo news agency reported Japan’s stimulus package could exceed 20 trillion yen ($129 billion) and be funded by an extra budget of around 17 trillion yen. Goushi Kataokam, a member of a key government panel, said on Wednesday that the Bank of Japan (BoJ) is unlikely to raise interest rates before March, adding that policymakers must first confirm that a major fiscal package is boosting domestic demand.

These remarks indicated that the Takaichi government wants interest rates to remain low, which exerts some selling pressure on the JPY and creates a tailwind for the cross. A Reuters poll showed on Thursday that a narrow majority of economists expect the Japanese central bank to raise rates to 0.75% in December, with all forecasters seeing at least that level by the end of the first quarter (Q1).

However, verbal intervention from Japanese authorities might help limit the JPY’s losses. Japan's Chief Cabinet Secretary Minoru Kihara said on Thursday that the recent FX moves are sharp and one-sided and that he is watching the FX market move with a high sense of urgency. Kihara further stated that the FX market needs to move stably, reflecting fundamentals.

The European Central Bank (ECB) has kept its key interest rates unchanged at its October meeting. Following the decision, many economists believe the easing cycle has ended for now and foresee rates on hold into 2026, barring major economic shocks. The cautious stance of the ECB could provide some support to the Euro against the JPY in the near term.

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.