The EUR/JPY pair extends its rally to around 181.20 during Asian trading hours on Thursday. The Japanese yen (JPY) weakens against the euro (EUR) amid market expectations that the new administration of Japanese Prime Minister Sanae Takaishi will deliver a massive spending package supported by low interest rates. The German Producer Price Index (PPI) and Eurozone Consumer Confidence reports will be published later on Thursday.
Japan’s stimulus package could exceed 20 trillion yen ($129 billion) and will be financed with an additional budget of about 17 trillion yen, Kyodo News reported. The Bank of Japan is unlikely to raise interest rates before March, Joshi Kataokam, a member of a key government committee, said on Wednesday, adding that policymakers must first ensure that the main fiscal package boosts domestic demand.
These comments indicated that the Takaishi government wants interest rates to remain low, putting some selling pressure on the Japanese yen and creating a hard currency tailwind. A narrow majority of economists expect the Bank of Japan to raise interest rates to 0.75% in December, with all forecasts expecting at least that level by the end of the first quarter (Q1), a Reuters poll on Thursday showed.
But verbal intervention by the Japanese authorities may help limit the Japanese yen’s losses. Japanese Cabinet Secretary Minoru Kihara said on Thursday that the recent foreign exchange market movements are sharp and one-sided, and that he is watching the foreign exchange market movement with a great sense of urgency. Kihara also stated that the forex market needs to move steadily, reflecting fundamentals.
The European Central Bank (ECB) kept key interest rates unchanged at its October meeting. Following the decision, many economists believe the easing cycle is over for now and expect interest rates to be held until 2026, barring major economic shocks. The ECB’s dovish stance may provide some support to the EUR/JPY in the near term.
Frequently asked questions about the Japanese Yen
The Japanese Yen (JPY) is one of the most widely traded currencies in the world. Their value is determined broadly by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the spread between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the powers of the Bank of Japan is to control the currency, so its movements are key to the yen. The Bank of Japan has intervened directly in currency markets on occasion, generally to devalue the yen, although it often refrains from doing so due to the political concerns of its major trading partners. The Bank of Japan’s ultra-loose monetary policy between 2013 and 2024 caused the yen to depreciate against its major counterparts due to the growing policy divergence between the Bank of Japan and other major central banks. More recently, the gradual dismantling of this ultra-lenient policy has given the yen some support.
Over the past decade, the Bank of Japan’s ultra-loose monetary policy stance has led to widening policy divergence with other central banks, especially the US Federal Reserve. This supported the widening of the spread between the US and Japanese 10-year bonds, which favored the US dollar against the Japanese yen. The Bank of Japan’s decision in 2024 to gradually abandon ultra-loose policy, along with interest rate cuts at other major central banks, are narrowing this spread.
The Japanese yen is often viewed as a safe investment. This means that in times of market stress, investors are more likely to put their money into the Japanese currency because of its supposed reliability and stability. Turbulent times are likely to strengthen the value of the yen against other currencies that are considered riskier to invest in.
