- EUR/JPY declines as the Japanese Yen strengthens on increased safe-haven demand.
- The Bank of Japan is widely expected to raise interest rates in 2025, supported by sustained wage growth and inflation.
- The Euro faces pressure as market sentiment weakens following the EU retaliatory tariffs on the United States.
EUR/JPY declines after two consecutive sessions of gains, trading around 161.10 during Asian hours on Thursday. The weakness of the currency cross is driven by a stronger Japanese Yen (JPY), which is benefiting from increased safe-haven demand.
The JPY remains supported by expectations that the Bank of Japan (BoJ) will continue raising interest rates this year, given persistent wage growth and inflation. BoJ Governor Ueda highlighted that long-term interest rates naturally adjust based on market expectations for future short-term rates, emphasizing the importance of clear communication on policy decisions.
On Wednesday, Japanese firms agreed to substantial wage hikes for the third straight year, aiming to help workers manage inflation and address labor shortages. Higher wages are expected to boost consumer spending, drive inflation, and give the BoJ more room for rate hikes.
However, Japanese Finance Minister Shunichi Kato cautioned on Thursday that Japan has yet to permanently overcome deflation, noting that the country's economy is facing a supply shortage rather than weak demand.
Additionally, the EUR/JPY cross faces pressure as the Euro (EUR) struggles amid dampened market sentiment following the European Union’s (EU) retaliatory tariffs on the United States (US). The US imposed a 25% tariff on European steel and aluminum, prompting the EU to respond with tariffs on €26 billion worth of US goods in April.
Traders remain cautious as Germany’s plans for a significant increase in state borrowing encounter new hurdles. On Wednesday, a co-leader of the Greens party remained non-committal about reaching a deal, while the far-left party filed another legal challenge.
Meanwhile, election winner Friedrich Merz is pushing to pass debt reforms and establish a €500 billion ($545 billion) infrastructure fund before the outgoing parliament dissolves. The success of these plans depends on support from the Greens and could also face potential roadblocks from court rulings, according to Reuters.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
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