The EUR/JPY pair is trading flat around the 183.80 level during early European trading hours on Tuesday. The expectation of an interest rate hike by the Bank of Japan (BoJ) in 2026 could provide some support to the Japanese yen (JPY) against the euro (EUR). Financial markets are expected to trade on thin volumes as traders prepare for the New Year holiday.
The Bank of Japan raised interest rates to 0.75% from 0.50%, the highest level in 30 years, at its policy meeting in December. A summary of opinions released earlier on Monday showed that some board members see the need to raise interest rates in the near future. Members also mentioned that the weakness of the Japanese yen and high long-term interest rates are partly due to the Bank of Japan’s interest rate being too low relative to inflation.
Finance Minister Satsuki Katayama said last week that Japan has free rein to deal with excessive movements in the Japanese yen. Verbal intervention from Japanese officials may also support the Japanese yen and create headwinds for the pair in the near term.
Potential downside for the euro may be limited amid signs that the European Central Bank’s (ECB) interest rate cutting cycle is over. The European Central Bank left interest rates unchanged earlier this month and hinted they were likely to remain that way for some time.
ECB President Christine Lagarde noted that the central bank cannot provide advance guidance on future interest rate movements due to high uncertainty, emphasizing a data-driven, meeting-by-meeting approach. Financial markets expected a 25 basis point interest rate cut by the European Central Bank in February 2026, and it currently remains below 10%.
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.
