Euro holds near five-week highs against Yen despite BoJ tightening rumours
- EUR/JPY reversal from five-week highs at 186-19 has been contained above 185.80.
- Reports that the BoJ might ramp up its tightening pace have had a moderate impact on Yen crosses.
- MUFG analysts suggest that the yen remains vulnerable amid concerns that the efforts to tackle inflation are poor.
The Euro (EUR) reversed earlier gains against the Japanese Yen (JPY) on Wednesday, following hawkish comments by Bank of Japan’s (BoJ) policymakers. The pair, however, remains a few pips below 186.00 at the time of writing, with the five-week high of 186.19 at a short distance.
The Japanese Yen bounced up across the board during Wednesday’s early European session, after a report by Bloomberg affirmed that BoJ officials are open to raising interest rates at a faster rate than the market consensus anticipates, as JPY’s weakness adds to inflation risks. The impact of these comments, however, has been limited so far, as markets remain sceptical that the central bank might ramp up its monetary tightening path, as it would clash with the Japanese government’s efforts to boost economic growth.
Yen and JGBs seen vulnerable as BoJ faces renewed inflation pressures
Analysts at MUFG warn that “inflation remains a key risk,” with services input prices pointing to upside risks in the coming months, leaving both “JGBs and the Yen vulnerable to further selling on concerns enough is not being done to reduce inflation risks.”
They also observe that the recent market moves could prompt a policy rethink in Tokyo: “the government could see this decline as a signal that they need to do more, which might lead to further BoJ independence.” In their view, “a hike is needed with inflation pressures building again.” Considering that “there is only 6bps priced for September, MUFG analysts add that “a more hawkish July communication would likely prompt a shift in expectations,” potentially setting the stage for a repricing of Japan rate risk.
In Europe, the focus is on the European Central Bank (ECB) monetary policy meeting, due on Thursday. The bank is widely expected to leave its benchmark interest rate unchanged, but markets are betting on further rate hikes in the coming months, as the recent uptrend in energy prices fuels inflationary pressures. Traders will be looking for signals to confirm those hopes, which might provide additional support to the Euro.
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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