Euro edges lower vs Japanese Yen as BoJ tightening bets support JPY

EUR/JPY trades around 184.10 on Monday at the time of writing, down 0.32% on the day, as the Japanese Yen (JPY) continues to benefit from a favorable backdrop driven by expectations of higher interest rates in Japan and renewed warnings from Japanese authorities regarding currency weakness.

The Euro (EUR) failed to benefit from the release of the Eurozone Sentix Investor Confidence Index. The indicator improved to -13.4 in June from -16.4 in May, signaling a recovery in investor sentiment. However, the index remains deeply in negative territory, highlighting persistent concerns about the region’s economic outlook.

Earlier in the day, German economic data weighed on the shared currency. Germany’s Factory Orders fell by 3.8% MoM in April after a revised 4.5% increase in March, significantly worse than the market expectation for a 1.2% decline. On an annual basis, orders rose by 1.6% after a revised 6.1% increase in the previous month, pointing to a loss of momentum in the manufacturing sector of Europe’s largest economy.

Investors are also focused on the upcoming European Central Bank (ECB) monetary policy meeting later this week. According to Commerzbank economist Rainer Guntermann, a 25-basis-point rate hike is almost certain and already fully priced in by markets. However, he believes another increase as soon as July would be premature and instead expects a further hike in September before lower energy prices help ease inflationary pressures and eventually create room for policy easing in the longer term.

On the Japanese side, fundamentals continue to support the Japanese Yen (JPY). Revised Gross Domestic Product (GDP) data confirmed that Japan’s economy expanded by 0.5% QoQ in the first quarter, while annualized growth reached 1.8%, outperforming market expectations. In addition, bank lending increased by 5.7% YoY in May, marking its fastest pace of growth since March 2021.

These indicators reinforce expectations that the Bank of Japan (BoJ) could tighten monetary policy at its upcoming meeting. Deutsche Bank noted that accelerating wage growth and resilient household spending continue to strengthen the case for a rate hike. Futures markets are therefore pricing in a high chance of a policy move in the near term.

Japanese Finance Minister Satsuki Takayama also stated on Friday that the government reserves the right to take decisive action against excessively volatile currency moves. These comments echoed those made ahead of the intervention episode in late April, when USD/JPY experienced a sharp decline. Meanwhile, Japan’s foreign exchange reserves recorded their largest monthly drop since records began in 2000, highlighting the scale of the authorities’ efforts to support the Japanese Yen.