EUR/JPY holds positive ground near 163.50 as BOJ holds rates steady

EUR/JPY trades in positive territory near 163.45 in Wednesday’s Asian session.
The BoJ left policy settings unchanged at its March meeting on Wednesday.
Germany's parliament approved plans for a massive spending surge on Tuesday, supporting the Euro.

The EUR/JPY cross extends the rally to around 163.45 during the Asian trading hours on Wednesday. As widely expected, the Bank of Japan (BoJ) decided to keep its policy rate unchanged on Wednesday after three hikes in the year since it ended the world’s last negative interest rate. The attention will shift to the Harmonized Index of Consumer Prices (HICP) inflation data from the Eurozone and the speeches from the European Central Bank (ECB) policymakers later on Wednesday.

The BoJ decided to keep the short-term interest rates target unchanged in the range of 0.40%- 0.50% at its March meeting on Wednesday. The decision aligned with the market expectations. The Japanese Yen (JPY) trades slightly weaker against the Euro (EUR) in an immediate reaction to the rate decision. The swaps markets are now pricing in nearly 71% odds of a hike by July and certainty by October.

Investors will keep an eye on the press conference by BoJ Governor Kazuo Ueda, which might offer some hints about the interest rate path in Japan. Meanwhile, the heightened economic uncertainty and rising geopolitical tensions in the Middle East could boost the safe-haven flows, which might underpin the JPY.

On the Euro front, the German parliament's approval of plans for a massive spending surge throws off decades of fiscal conservatism in hopes of boosting economic growth and scaling up military spending for a new era of European collective defence. This, in turn, lifts the shared currency against its rivals. "Germany, and by extension the euro zone, getting their fiscal act together is not only long overdue, but supports the bull case for the common currency over the medium-term," noted Michael Brown, senior research strategist at Pepperstone.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

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.

How do the decisions of the Bank of Japan impact the Japanese Yen?

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.

How does the differential between Japanese and US bond yields impact the Japanese 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.

How does broader risk sentiment impact the Japanese Yen?

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.