EUR/JPY softens below 1.1600 as the EU imposes new sanctions on Russia
- EUR/JPY drifts lower to around 1.1590 in Thursday’s Asian session.
- EU agrees on fresh Russia sanctions over the Ukraine war.
- Analysts expect the BoJ will raise rates by early next year, though the timing remains uncertain.
The EUR/JPY cross loses ground to near 1.1590 during the Asian trading hours on Thursday. The Euro (EUR) weakens against the Japanese Yen (JPY) after the European Union (EU) agreed to impose new sanctions on Russia over the war in Ukraine. The preliminary reading of Eurozone Consumer Confidence for October is due later on Thursday.
The EU and the US on Wednesday imposed new sanctions against Russia, citing Moscow's lack of serious commitment to a peace process to end the war in Ukraine. The fresh sanctions were announced one day after plans for a summit between US President Donald Trump and Russian President Vladimir Putin were put on hold
The EU’s decision to impose sanctions on Russia might boost the JPY and create a headwind for the cross, as traders factor in potential economic headwinds for the Eurozone region and shift toward safer assets amid rising geopolitical tensions.
Japan's new Prime Minister Sanae Takaichi is preparing a fresh economic stimulus package that is likely to exceed last year's $92 billion to help households tackle inflation. Traders expect expansionary fiscal policy and a looser Bank of Japan (BoJ) monetary policy would undermine the JPY.
According to the majority of economists polled by Reuters, nearly 60% expect the BoJ to raise rates by 25 basis points (bps) this quarter. Nearly 96% of economists expect borrowing costs to increase at least 25 bps by the end of March.
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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