EUR/JPY Currency Pair

The EUR/JPY cross has attracted some buyers, reaching around 167.50 during the early European session on Friday. This surge is largely due to the uncertainty surrounding the timing of the next Bank of Japan (BoJ) rate hike, which is weighing on the Japanese Yen (JPY).

Factors Influencing the JPY

Several factors are contributing to the JPY’s downside. BoJ Governor Kazuo Ueda recently stated that the central bank’s near-term attention is focused on downside risks to Japan’s economy, with the impact of US tariffs expected to worsen in the second half of this year. This remark suggests that the Japanese central bank is in no hurry to begin rate hikes, which undermines the JPY and acts as a tailwind for the cross.

Tariff Uncertainty

Japan’s top trade negotiator, Ryosei Akazawa, stated that trade negotiations with the US "remained in a fog" despite efforts by both sides to seek a deal. This uncertainty might contribute to the JPY’s downside. Additionally, Akazawa mentioned that Japan will not fixate on the looming date for so-called reciprocal tariffs to go back to higher levels.

European Central Bank’s Policy Outlook

The hawkish tone surrounding the European Central Bank’s (ECB) policy outlook has lifted the shared currency. ECB President Christine Lagarde noted that rate reductions are coming to an end as the central bank is now “in a good position” to deal with prevailing uncertainties.

Japan’s National Consumer Price Index

Data released by the Japan Statistics Bureau showed that the country’s National Consumer Price Index (CPI) rose by 3.5% YoY in May, compared to the previous reading of 3.6%. Meanwhile, the National CPI ex Fresh food came in at 3.7% YoY in May versus 3.5% prior. This figure was above the market consensus of 3.6%. The National CPI ex Fresh Food, Energy rose 3.3% YoY in May, compared to the previous reading of 3.0%. This reading could provide some support to the JPY and cap the upside for the cross.

Understanding the Japanese Yen

The Japanese Yen 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.

Bank of Japan’s Policy

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.

Policy Divergence

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.

Safe-Haven Investment

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.

Conclusion

In conclusion, the EUR/JPY cross is experiencing a rally due to various factors, including the uncertainty surrounding the next BoJ rate hike, tariff uncertainty, and the ECB’s policy outlook. Understanding the Japanese Yen’s value and its influencing factors, such as the Bank of Japan’s policy and policy divergence, can provide insights into the currency’s behavior. As the global economic landscape continues to evolve, it is essential to stay informed about the latest developments affecting the EUR/JPY cross and the Japanese Yen.