The EUR/JPY cross gains ground near 178.00 during the early European session on Monday. The expectation that Japan’s new Prime Minister Sanae Takaichi would maintain expansionary spending policies and resist early tightening weighs on the Japanese Yen (JPY) against the Euro (EUR). Traders brace for the German IFO Business Survey data later on Monday.
Reports suggest Takaichi may unveil a major stimulus package as soon as next month, potentially exceeding last year’s 13.9 trillion yen program aimed at easing inflationary pressures on households. The potential aggressive fiscal expansion under the new government and uncertainty over the Bank of Japan’s (BoJ) policy outlook weigh on the JPY and create a tailwind for the pair.
Meanwhile, the BoJ is broadly expected to hold its interest rate steady at 0.5% at its upcoming policy meeting on Thursday. Traders will closely monitor the guidance from BoJ Governor Ueda following the meeting for fresh impetus.
On the Euro front, France’s Socialist party leader has threatened to bring down Prime Minister Sébastien Lecornu’s government by Monday if their budget conditions are not met, Reuters reported on Friday. Olivier Faure, whose party holds a swing vote in the hung parliament, said that he would file a no-confidence bill early next week if billionaires are not forced to pay more tax.
Earlier this month, Lecornu agreed to suspend an unpopular pension reform so the Socialists could help him survive a no-confidence vote in parliament. Fears of a political crisis in France could undermine the EUR against the JPY in the near term.
Analysts expect the European Central Bank (ECB) to keep its interest rates unchanged at its policy meeting on Thursday, for the third consecutive time. ECB officials indicated that the current level is appropriate given the inflation outlook. The ECB Governing Council member José Luis Escrivá said on Sunday that he is satisfied with the current settings for borrowing costs.
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.
