EUR/JPY strengthens to near 184.00 on BoJ rate hike uncertainty

EUR/JPY strengthens to around 183.90 in Wednesday’s early European session.
The BoJ is likely to raise rates by the end of June, with expectations unchanged by the Middle East war, according to a Reuters poll.
Escalation of conflict in the Middle East might help limit the Japanese Yen’s losses.

Lallalit Srijandorn FXStreet

The EUR/JPY cross gains ground to near 183.90 during the early European session on Wednesday. The Japanese Yen (JPY) softens against the Euro (EUR) amid market doubt about the speed of the Bank of Japan (BoJ) normalization. Traders will keep an eye on the final reading of the Harmonized Index of Consumer Prices (HICP) from Germany, which is due later on Wednesday.

A Reuters poll showed on Wednesday that all 64 respondents said the BoJ would keep rates unchanged at 0.75% at its upcoming policy meeting next week. Nonetheless, 60% of economists anticipate the policy rate will reach 1.00% by the end of June, largely unchanged from 58% in February's poll.

Last week, BoJ Governor Kazuo Ueda signaled a likely prolonged hold on interest rates due to the potential economic impact of the Middle East conflict.

Rising geopolitical tensions in the Middle East, particularly threats to the Strait of Hormuz, could boost a safe-haven currency such as the Japanese Yen and act as a headwind for the cross.

Iran’s Islamic Revolutionary Guard Corps (IRGC) warned that if US and Israeli attacks continue, Iran could block regional oil exports. On Wednesday, the IRGC announced the start of targeting the enemy's technological infrastructure in the region, raising fears of a prolonged war in the region.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

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.

How do the decisions of the Bank of Japan impact the Japanese Yen?

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.

How does the differential between Japanese and US bond yields impact the Japanese 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.

How does broader risk sentiment impact the Japanese Yen?

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.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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