EUR/JPY Climbs as Markets Question BoJ Policy Path

Key Moments

EUR/JPY Edges Higher Amid BoJ Uncertainty

The EUR/JPY pair advances toward 183.90 in early European trade on Wednesday, with the Japanese Yen (JPY) losing ground against the Euro (EUR). The move reflects investor uncertainty over how quickly the Bank of Japan (BoJ) will continue normalizing monetary policy. Market participants are also awaiting the final reading of Germany’s Harmonized Index of Consumer Prices (HICP), scheduled for release later on Wednesday.

Market Expectations for BoJ Policy Path

According to a Reuters poll released on Wednesday, all 64 surveyed respondents expect the BoJ to leave its key interest rate unchanged at 0.75% at its policy meeting next week. Despite this consensus on the near-term decision, 60% of economists in the survey project that the policy rate will rise to 1.00% by the end of June, only slightly above the 58% share recorded in the February poll.

Last week, BoJ Governor Kazuo Ueda indicated that interest rates are likely to remain on hold for an extended period, citing concerns about the potential economic fallout from the conflict in the Middle East.

Geopolitical Tensions and Safe-Haven Dynamics

Heightened geopolitical risk in the Middle East, particularly threats involving the Strait of Hormuz, has the potential to lift demand for safe-haven assets such as the Japanese Yen and could act as a drag on the EUR/JPY cross.

Iran’s Islamic Revolutionary Guard Corps (IRGC) has cautioned that if US and Israeli strikes continue, Iran may move to obstruct regional oil exports. On Wednesday, the IRGC reported the beginning of operations targeting the enemy’s technological infrastructure in the region, intensifying concerns about a drawn-out conflict.

Japanese Yen: Key Drivers and Market Role

The Japanese Yen (JPY) is among the most actively traded currencies worldwide. Its valuation is heavily influenced by the performance of the Japanese economy, with particular focus on the Bank of Japan’s policy stance, the spread between Japanese and US government bond yields, and overall risk appetite in global markets, among other elements.

BoJ Policy and Its Impact on the Yen

One of the Bank of Japan’s responsibilities is currency-related oversight, making its actions pivotal for the Yen. The central bank has at times intervened directly in the foreign exchange market, typically aiming to weaken the Yen, though such moves are limited by political sensitivities with major trading partners. The BoJ’s ultra-loose policy between 2013 and 2024 contributed to Yen depreciation versus key currencies, driven by growing divergence between BoJ policy and that of other major central banks. More recently, the gradual reversal of this ultra-loose stance has provided some support to the currency.

Yield Differentials and Risk Sentiment

Over the past decade, the BoJ’s commitment to very accommodative policy has led to an expanding gap between Japanese and US interest rates, particularly at the 10-year maturity. This widening differential has generally favored the US Dollar over the Japanese Yen. The BoJ’s decision in 2024 to progressively step away from its ultra-loose framework, combined with interest-rate reductions by other major central banks, is helping to narrow this spread.

The Japanese Yen is also widely regarded as a safe-haven asset. During episodes of market stress, investors tend to allocate more capital to the Yen, drawn by its perceived stability and reliability. As a result, periods of heightened uncertainty or turbulence typically strengthen the Yen relative to currencies that are seen as carrying higher risk.