EUR/JPY moves above 156.50, upside seems limited due to rising odds of BoJ’s rate hikes

EUR/JPY appreciates traders expect Japan to face Trump's trade tariffs.
President Trump reaffirmed his commitment to address the US trade deficit with Japan.
German Chancellor Olaf Scholz stated that the EU could react “within an hour” if the US imposes the proposed tariffs.

EUR/JPY halts its three-day losing streak, trading around 156.70 during the Asian session on Monday. The upside of the currency cross could be attributed to worries that Japan would also be an eventual target of US President Donald Trump's trade tariffs.

President Trump told reporters aboard Air Force One on Sunday that he plans to impose a 25% tariff on all steel and aluminum imports, without specifying the affected countries. Trump also stated that additional reciprocal tariffs would be unveiled by midweek and implemented almost immediately, mirroring the tariff rates set by each country, according to Reuters.

During a news conference on Friday with Japanese Prime Minister Shigeru Ishiba, US President Donald Trump reaffirmed his commitment to addressing the US trade deficit with Japan, which currently stands at approximately $65 billion per year. Trump also noted Japan's pledge to double its defense spending by 2027 compared to his first term. Additionally, Japan is set to start importing new shipments of American liquefied natural gas.

The Japanese Yen (JPY) may strengthen due to rising expectations of the Bank of Japan (BoJ) raising interest rates again this year. An increase in Japanese government bond (JGB) yields could further support the lower-yielding JPY.

However, the upside of the EUR/JPY cross could be restrained amid rising concerns over potential deflationary pressures in the Eurozone due to expected US tariffs have intensified odds of deeper ECB rate cuts, with markets now predicting the deposit rate could fall to 1.87% by December.

In response to Trump’s announcement of new tariff plans, German Chancellor Olaf Scholz stated that the European Union (EU) could react “within an hour” if the US imposes the proposed tariffs. Separately, Bernd Lange, head of the European Parliament’s trade committee, suggested that to avoid a trade war, the EU is open to reducing its 10% import tax on vehicles to a rate closer to the 2.5% tariff imposed by the US.

Tariffs FAQs

What are tariffs?

Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.

What is the difference between taxes and tariffs?

Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.

Are tariffs good or bad?

There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.

What is US President Donald Trump’s tariff plan?

During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.