EUR/JPY flattens around 163.00, Japan Q1 GDP contracts by 0.2%
- EUR/JPY recoups losses and flattens around 163.00, while Japan’s Q1 GDP data came in weaker than expected.
- BoJ’s Nakamura warns of downside economic risks due to the fallout of tariffs by the US.
- ECB’s Kazaks expects two more interest rate cuts, sees the Deposit Facility rate declining to 1.75%.
The EUR/JPY pair trades flat around 163.00 after recovering its initial losses during North American trading hours on Friday. The cross rebounds as the Japanese Yen (JPY) faces slight selling pressure, following the release of the Japan Q1 Gross Domestic Product (GDP) data.
The Japanese Cabinet Office reported that the economy contracted by 0.2% in the first quarter of the year, faster than expectations of 0.1%. On an annualized basis, the economy shrank at a faster pace of 0.7%, compared to estimates of a 0.2% decline. In the first quarter of 2024, the economy rose at a robust pace of 2.2%.
Weak GDP data is expected to discourage the Bank of Japan (BoJ) from raising interest rates in the future. Earlier in the day, BoJ board member Toyoaki Nakamura warned of growing downside risks to the economy due to the fallout of tariffs by United States (US) President Donald Trump, which have prompted global economic uncertainty.
Meanwhile, the Euro (EUR) trades calmly while investors ignore firm expectations that the European Central Bank (ECB) will cut interest rates again in the June policy meeting. ECB officials have argued in favor of reducing interest rates further due to downside Eurozone economic risks and confidence that the disinflation trend is intact.
During European trading hours, ECB Governing Council member Martins Kazaks stated that there may still be a “couple” of reductions in the deposit rate this year from its current level of 2.25%, Bloomberg reported.
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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