EUR/JPY rebounds as Yen pressured by political uncertainty and soft jobs data
- EUR/JPY rebounds to 173.00 after dipping to its lowest level since September 9.
- Political uncertainty weighs on the Yen ahead of the LDP leadership election on Saturday.
- The common currency struggles to extend gains despite a softer Yen due to weak Eurozone data.
The Euro (EUR) gains traction against the Japanese Yen (JPY) on Friday, recovering after briefly slipping to its lowest level since September 9 on Thursday. At the time of writing, EUR/JPY trades near 173.00, staging a modest rebound from recent lows.
The Japanese Yen remains broadly under pressure against major peers, weighed down by political uncertainty as the ruling Liberal Democratic Party (LDP) prepares to elect its new leader this weekend, a contest that will effectively determine the country’s next prime minister. Meanwhile, Japan’s August Unemployment Rate rose to 2.6%, above the forecast 2.4% and up from 2.3% in July, reinforcing the view of a cooling labour market and further undermining the Yen’s appeal.
However, the Euro’s advance has been limited by lacklustre Eurozone data. The HCOB Composite Purchasing Managers Index (PMI) for September rose to 51.2 from 51.0 in August, in line with expectations, while the Services PMI rose to 51.3, missing the 51.4 forecast.
Additionally, August’s Producer Price Index (PPI) fell 0.3% MoM, compared with expectations for a 0.1% decline and down from a 0.3% increase in July, while the annual PPI eased by -0.6% YoY, below the forecast for a 0.4% decrease and sharply lower than the 0.2% gain recorded in the previous month. The weaker data offered little support to the common currency, leaving it struggling to extend gains despite the Yen’s broader weakness.
Meanwhile, Bank of Japan (BoJ) Governor Kazuo Ueda struck a cautiously hawkish tone in a speech on Friday, reiterating that the central bank stands ready to raise interest rates if the economic and inflation outlook warrant it. Ueda also highlighted global uncertainties, including softer US labour market trends and tariff-related headwinds, which could weigh on corporate wage growth and keep the timing of any further policy moves uncertain.
(This story was corrected on October 3 at 15:45 GMT to note that the HCOB Eurozone Composite PMI edged up to 51.2 from 51.0 in August, not held steady as previously stated.)
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.
The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.
A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.