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EUR/JPY forecast: Euro weakness overshadowed by freefalling yen as BoJ stands pat

By Nicole Willing

Edited by Valerie Medleva

14:33, 28 September 2022

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EUR/JPY
EUR/JPY
143.353 USD
-0.099 -0.070%
USD/JPY
USD/JPY
136.272 USD
-0.733 -0.530%

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Japanese Yen and Euro bank note
Yen decline outweighs euro weakness – Source: hxdbzxy / Shutterstock.com

Both the euro (EUR) and the Japanese yen (JPY) have come under pressure from a strong US dollar (USD), with the greenback trading at its highest level against a basket of currencies since May 2002. But what does that mean for the way the two currencies are trading against each other? 

The Japanese yen has weakened to its lowest level against the euro since 2014, with the EUR/JPY exchange rate having climbed sharply since March.

What has been driving the value of the EUR/JPY pair? And what does its future look like?  

In this article, we look at the pair’s performance as well as check out the latest euro to Japanese yen forecast round-up from several analysts.

What drives the EUR/JPY exchange rate?

In foreign exchange (forex; FX) markets, currencies are traded as pairs of quote and base currencies. The EUR/JPY pair refers to how many Japanese yen – the quote currency – that one euro – the base currency – can buy. 

The EUR/JPY is known as a cross rate – a pair that does not include the US dollar. It’s one of the most traded FX pairs. It includes the popular EUR and the volatile JPY, which has historically been viewed as a safe haven currency because of Japan’s stable governance and economic policy as well as large foreign investment asset reserves.

Prolonged low Japanese interest rates prompted investors to borrow money in yen to finance investments in assets in countries with higher yields, known as the carry trade. However, the carry trade became less attractive in recent years as other countries cut their interest rates close to zero or even negative, as in the case of the eurozone, to support their economies during the Covid-19 pandemic.

The yen has lost its safe-haven appeal as investors have flocked to the US dollar (USD) at a time of geopolitical and economic uncertainty, and as interest rates in Japan have remained close to zero while US Treasury yields are on the rise, offering investors fixed income returns.

Currency values are typically driven by macroeconomic factors such as gross domestic product (GDP) growth, industrial production, trade balances, employment rates, government fiscal policy, and monetary policy on interest rates and inflation. Multi-decade high inflation has prompted central banks around the world to rapidly raise interest rates in 2022, driving increased volatility on the currency markets.

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EUR/JPY rate volatility rises on interest rate effect

The EUR/JPY exchange rate climbed to a record high of 169 during the financial crisis in 2008, then trended down to around 96 in January 2012. The pair traded up to 146.33 in January 2014, and between 114 and 135 over the past few years.

EUR/JPY started 2022 at the 130 level and has been volatile this year, trading down to 125.21 on 7 March, then rallying to 139. The pair moved down to 133.18 on 12 May, rebounding to 143.97 in June. 

The European Central Bank (ECB) raised its benchmark deposit interest rate for the first time since 2011, pulling it out of negative territory, where it’s been since 2014. The ECB raised the rate by 50 basis points (bps), above traders’ expectations of a 25-basis point hike.

The EUR/JPY rate was trading down at 135.06 at the start of August and ended the month at 139.56. On 12 September, the pair rallied to 144.57, its highest level since 2014. On 9 September, the ECB raised the benchmark interest rate by a record 75 bps to 0.75%, and is expected to raise rates further in the coming months.

But EUR/JPY dropped to 138.94 on 23 September, as the Japanese government intervened in the currency market on 22 September for the first time since the 1997-1998 Asian financial crisis. But the Bank of Japan (BoJ) also said that it would hold its policy rate at -0.10% and the 10-year Japanese government bond yield target around zero.

The yen has come under pressure as the US Federal Reserve (Fed) has raised interest rates five times in 2022, as of 27 September, with more hikes to come, lifting the dollar to two-decade highs against a basket of currencies. At the same time, the euro has weakened against the dollar on concerns about the Russia-Ukraine conflict and the impact of the ongoing energy crisis in Europe on economic growth in the Eurozone.

EUR/JPY traded up to 139.55 on 27 September, with the influence of the yen intervention expected to be short-lived.

GBP/JPY

166.51 Price
+0.170% 1D Chg, %
Long position overnight fee 0.0000%
Short position overnight fee -0.0001%
Overnight fee time 22:00 (UTC)
Spread 0.028

EUR/USD

1.05 Price
+0.460% 1D Chg, %
Long position overnight fee -0.0076%
Short position overnight fee 0.0030%
Overnight fee time 22:00 (UTC)
Spread 0.00006

AUD/USD

0.67 Price
+0.650% 1D Chg, %
Long position overnight fee -0.0036%
Short position overnight fee 0.0007%
Overnight fee time 22:00 (UTC)
Spread 0.00006

USD/JPY

136.27 Price
-0.530% 1D Chg, %
Long position overnight fee 0.0051%
Short position overnight fee -0.0116%
Overnight fee time 22:00 (UTC)
Spread 0.008

Flash purchasing managers’ index (PMI) data for Japan on 26 September showed “ongoing challenges despite modest improvement in services activity,” analysts at Daiwa Capital Markets noted. 

“Contrasting with last week’s downbeat euro area flash PMIs that signalled a steeper pace of contraction at the end of Q3, today’s Japanese surveys implied a modest rebound in the economy amid the further relaxation of Covid-19 restrictions. Indeed, the headline composite PMI rose 1.5pts to 50.9, with the new business component up 1.6pts to 51.0, reflecting a marked improvement in the services sector, with the activity PMI up 2.4pts to 51.9 and the new business index up 2.9pts to 52.8. Admittedly, these measures were merely their highest since June.” 

The flash eurozone PMI data on 23 September showed services at a 19-month low of 48.9, down from 49.8 in August, and manufacturing at a 27-month low of 48.5, down from 49.6 – a number below 50 denotes a contraction in activity.

How could the EUR/JPY pair perform for the rest of 2022 and over the coming years? Let’s review the EUR/JPY forecast outlook below.

EUR/JPY forecast: Where to next?

According to an analysis by Japanese bank Mizuho, “International Monetary Market (IMM) data as of 20 September showed investors turning more positive on EUR but not JPY”.

Analysts at Hong Kong-based Hang Seng bank indicated on 26 September that “as the Bank of Japan announced that it would not raise interest rates, and the remarks continued to be dovish, the fundamentals remained unchanged, and the downward trend of the yen is expected to remain difficult to change”.

Irish bank AIB was bearish in its outlook for the yen, with its EUR/JPY prediction indicating that the pair could rise from an average of 139 for the rest of 2022 to 142 in the first quarter of 2023 and 144 in the second quarter. 

Currency exchange firm Convera said: 

“Energy challenges in the Eurozone and UK (high inflation) and potential changes of governance in the UK and Italy, suggest the yen has a better chance of strengthening against the EUR and GBP than the US dollar.”

Analysts at US-based Citibank expected the euro to weaken against the yen: “The key driver for EUR remains the outlook for Russian gas supplies to Europe and so far, the EU energy response lacks broad agreement. Meanwhile, ECB’s 75bp hike at the September meeting comes against the backdrop of a potential euro area recession next year. The outlook for EUR therefore remains bleak and looks likely to underperform CHF, Commodity Bloc (especially AUD) and ultimately JPY.”

Analysts at financial services firm State Street also expected the euro to underperform: “Going forward, we remain moderately bearish on the EUR. The build in gas reserves for the winter is a clear positive and should reduce the need for sudden, dramatic rationing later this year that could have threatened to shut down entire industries via rolling natural gas blackouts. However, this provides little solace. Even with storage at 100%, a complete shutdown of Russian supplies remains a high risk and will keep prices at extreme levels… This is likely to drive the EU into recession over the coming quarters. 

“At the current levels, the EUR already reflects a healthy recession risk premium and the prospect of faster ECB rate hikes should help alleviate some short-term pressure on the currency. However, any relief from monetary tightening may be muted.”

French bank BNP Paribas was neutral in its short-term outlook on the EUR/JPY rate, with a three-month target of 144 and a 12-month EUR/JPY forecast of 140.

The EUR/JPY forecast for 2022 from Dutch bank ING was bearish on the euro, predicting that the pair could decline from 140 at the end of the third quarter this week to 135 by the end of the year. The pair could then move up to 136.50 by the end of the second quarter of 2023 and return to 135 in the third quarter. However, the EUR/JPY could remain volatile, rising to 137.50 by the end of the year, sliding to 135.42 in the first quarter of 2024 and rebounding to 138 at the end of 2024.

The EUR/JPY forecast for 2025 from algorithm-based forecaster Wallet Investor was bullish on the euro, projecting that the pair could end the year at 156.942, up from 140.644 at the end of 2022 and 146.555 at the end of 2023.

Meanwhile, the EUR/JPY forecast from Trading Economics was more cautious, indicating that the pair could move up from 138.968 at the end of this quarter to 139.381 in one year, based on global macro model projections and analysts’ expectations.

For the long term, the EUR/JPY forecast 2030 from AI Pickup projected that the yen could strengthen, bringing the pair down to an average of 127.18, from 137.56 in 2022.

If you are looking for a EUR/JPY forecast to trade on, it’s important to remember that currency markets are highly volatile, making it difficult for analysts and algorithm-based forecasters to come up with accurate long-term predictions. We recommend that you always do your own research. Look at the latest market trends, news, technical and fundamental analysis, and expert opinion before making any investment decision. Keep in mind that past performance is no guarantee of future returns.

FAQs

Why has EUR/JPY been rising?

The euro has made gains against the Japanese yen this year despite weakness in the currency. The yen has come under pressure from a strong US dollar and the Bank of Japan’s decision not to raise interest rates in line with the US Federal Reserve and European Central Bank.

Will EUR/JPY go up or down?

The direction of the euro against the Japanese yen could depend on economic activity in the eurozone and Japan, as well as fiscal and monetary policy, among other factors.

When is the best time to trade EUR/JPY?

Technically, you can trade currency pairs, including EUR/JPY, around-the-clock. However, there are certain time slots when forex trading is busier such as during the release of major economic announcements, like trade data, inflation and interest rates. 

You should make trading decisions after conducting your own research. Remember that high volatility can increase the risk of losses.

Is EUR/JPY a buy, sell or hold?

How you trade the euro against the Japanese yen is a personal decision depending on your trading strategy, risk tolerance and investing goals. You should do your own research to take an informed view of the market. Keep in mind that past performance is no guarantee of future returns. And never invest money you cannot afford to lose.

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