Euro Gains Against Yen as Weak Japan Data Hurts JPY

Key Moments

EUR/JPY Supported by Diverging Policy Outlooks

EUR/JPY maintained its upward momentum for a fourth consecutive session, trading near 185.40 during Asian hours on Tuesday. The cross continued to climb as the Japanese Yen (JPY) weakened in response to soft domestic data and lingering concerns over Japan’s economic trajectory.

The latest leg higher in the pair comes amid renewed pressure on Japan’s growth outlook and a widening contrast between Bank of Japan (BoJ) and European Central Bank (ECB) policy expectations.

Japan’s Household Spending Slumps Again

Japan’s internal affairs ministry reported a 2.9% year-over-year decline in household spending for March, a sharper drop than anticipated. The figure marked the fourth straight month of falling personal consumption and underscored the strain on households from ongoing inflation.

Persistent price pressures are eroding purchasing power and keeping consumer demand under pressure, raising questions about the durability of Japan’s domestic recovery. The outlook is further clouded by what the article describes as growing global economic anxiety linked to escalating tensions between the United States and Iran.

BoJ Balances Normalization Hopes and Geopolitical Risks

The BoJ’s internal debate appears to be intensifying. The Summary of Opinions from the April meeting indicated that some policymakers view real interest rates as sufficiently low to justify additional increases. At the same time, other members argued for caution due to uncertainty surrounding the Middle East situation.

Despite these reservations, the overall tone pointed to the possibility of another rate hike as early as the next policy meeting. This relatively hawkish stance was accompanied by a coordinated communication effort, with Finance Minister Satsuki Katayama reaffirming close collaboration on currency stability with US Treasury Secretary Scott Bessent.

ECB Hawkishness Lifts the Euro

On the European side, EUR/JPY has been buoyed by a firmer Euro and clear hawkish signals from the ECB. Governing Council member Martin Kocher reiterated that the central bank stands ready to continue raising interest rates if energy prices remain elevated.

According to current market pricing cited in the article, investors are assigning a 92% probability to a rate hike in June and project three total increases by 2026. This prospective policy path contrasts with the BoJ’s more gradual normalization approach, reinforcing the positive bias in EUR/JPY.

Background: Euro and Key Drivers

What is the Euro?

The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day.

EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

The Role of the ECB in the Eurozone

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy.

The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa.

The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

Inflation Data and the Euro

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control.

Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

Economic Indicators and Currency Performance

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency.

A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall.

Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

Trade Balance as a Driver of the Euro

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period.

If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.