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21 Feb 2025
EUR/JPY gains traction above 157.50, investors brace for Eurozone/German PMI data
- EUR/JPY gains momentum to near 157.70 in Friday’s Asian session.
- Japan's core consumer inflation reinforced expectations that the BoJ will keep raising interest rates.
- The ECB’s dovish stance might drag the Euro lower and cap the upside for the cross.
The EUR/JPY cross attracts some buyers to around 157.70 during the Asian trading hours on Friday. The Japanese Yen (JPY) softens after the Japanese policymaker said that higher long-term rates can pressure Japan's fiscal situation. Investors will take more cues from the preliminary HCOB Purchasing Managers Index (PMI) for February from Germany and the Eurozone, which is due later on Friday.
Japan's Finance Minister, Katsunobu Kato said early Friday that higher Japanese government bond yields will increase debt-servicing costs, which, in turn, may impact Japan's finances. The JPY edges lower in an immediate reaction to these remarks.
Nonetheless, Japan's core consumer inflation hit its fastest pace in 19 months. Data released by the Japan Statistics Bureau on Friday showed that the country’s National Consumer Price Index (CPI) jumped 4.0% YoY in January, compared to the previous reading of 3.6%.
Meanwhile, the CPI ex Fresh food rose 3.2% YoY in January versus 3.0% prior. The figure was above the market consensus of 3.1%. Hotter-than-expected inflation figures strengthened the case for a hawkish outlook on the Bank of Japan (BoJ) monetary policy, which might cap the downside for the JPY.
BoJ Governor Kazuo Ueda signaled his readiness to keep raising rates if wages continue to increase and underpin consumption, thereby allowing firms to keep hiking pay.
The growing speculation of further interest rate reductions from the European Central Bank (ECB) could weigh on the Euro (EUR). Analysts expect the European Central Bank (ECB) to deliver quarter-point cuts at every meeting until mid-2025. That would bring the deposit rate to 2.0%.
Japanese Yen FAQs
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.
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.
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.
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.