EUR/JPY holds steady below 184.00, BoJ signals further tightening
- EUR/JPY flat lines near 183.80 in Tuesday’s early European session.
- BoJ’s Summary of Opinions showed board members saw the need for rate hikes.
- Expectations that the current cycle of ECB interest rate cuts is coming to an end might help limit the EUR’s losses.
The EUR/JPY cross trades on a flat note around 183.80 during the early European trading hours on Tuesday. Expectation of additional rate hikes by the Bank of Japan (BoJ) in 2026 could provide some support to the Japanese Yen (JPY) against the Euro (EUR). Financial markets are expected to trade on thin volumes as traders prepare for the New Year holiday.
The Japanese central bank raised its policy rate to 0.75% from 0.50%, the highest level in 30 years, at its December policy meeting. A summary of opinions released earlier on Monday showed that some board members see the need for further rate increases in the near future. Members also stated that the weaker JPY and rising long-term interest rates were due in part to the BoJ's policy rate being too low relative to inflation.
Finance Minister Satsuki Katayama said last week that Japan has a free hand in dealing with excessive moves in the Japanese Yen. Verbal intervention from Japanese officials might also underpin the JPY and create a headwind for the cross in the near term.
The potential downside for the Euro might be limited amid signals that the European Central Bank (ECB) rate cut cycle is ending. The ECB left interest rates unchanged earlier this month and hinted they would likely remain so for some time.
ECB President Christine Lagarde noted that the central bank cannot provide forward guidance on future rate moves due to high uncertainty, emphasizing a data-dependent, meeting-by-meeting approach. The money markets have priced in for a 25 bps interest rate cut by the ECB in February 2026, currently remaining below 10%.
Japanese Yen FAQs
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.
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.
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.
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.
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