EUR/JPY loses traction below 183.00 as Middle East conflict lifts Japanese Yen
- EUR/JPY loses ground to around 182.95 in Monday’s early European session.
- Geopolitical risks in the Middle East could boost the Japanese Yen, a safe-haven currency.
- BoJ is likely to hold off on raising interest rates until June or July.
The EUR/JPY cross trades in negative territory near 182.95 during the early European session on Monday. The Japanese Yen (JPY) edges higher against the Euro (EUR) on escalating conflict in the Middle East. The German January Industrial Production data is due later on Monday. On Tuesday, the attention will shift to Japan’s Q4 Gross Domestic Product report.
The US-Israeli war with Iran has entered its 10th day. Iran named Mojtaba Khamenei, the second son of the late Ayatollah Ali Khamenei, as the new Supreme Leader. He succeeds his father, Ayatollah Ali Khamenei, who was killed in the initial wave of US-Israeli strikes.
US President Donald Trump demanded Iran’s "unconditional surrender" and indicated he expects a role in selecting a leader "acceptable" to the White House. Iran has launched missiles and drones at Israel and several Gulf states in the past days, including Saudi Arabia, the UAE, Kuwait, and Bahrain. Rising tensions in the Middle East could provide some support to the JPY and act as a headwind for the cross in the near term.
On the other hand, uncertainty surrounding the Bank of Japan (BoJ) interest rate path might cap the upside for the JPY. BoJ Governor Kazuo Ueda last week signaled a likely prolonged hold on interest rates due to the potential economic impact of the Middle East conflict. While some analysts expected a BoJ March hike, many now anticipate the Japanese Yen central bank to stand pat until at least April or July, according to Reuters.
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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