- The euro weakened against the yen as wage increases likely led to a rate hike by the Bank of Japan.
- Labor income in Japan increased by 4.8% on an annual basis in December, compared to 3.9% in November.
- The euro remains under pressure as investors brace for Trump’s possible tariffs on the eurozone.
EUR/JPY Declines Toward 159.00 Amid Strengthening Japanese Yen and Rising Wage Growth
EUR/JPY has retreated after the previous session’s gains, trading near 159.00 during Asian trading hours on Wednesday. This pullback is largely driven by the strengthening Japanese Yen (JPY), which has been supported by rising wages in Japan and increasing expectations of further interest rate hikes by the Bank of Japan (BoJ).
Japan’s Labor Cash Earnings rose 4.8% year-on-year in December, up from 3.9% in November, significantly surpassing the market expectation of 3.8%. This marks the strongest wage growth in almost 30 years. Additionally, inflation-adjusted real wages, which reflect consumer purchasing power, grew by 0.6% in December, recording two consecutive months of positive growth.
Japanese Economy Shows Continued Expansion
In addition to rising wages, Japan’s economic outlook remains positive, further bolstering the Yen. The Jibun Bank Composite Purchasing Managers’ Index (PMI) increased to 51.1 in January 2025, up from 50.5 in December, marking three straight months of private sector expansion. The Services PMI was revised upward to 53.0, compared to a preliminary estimate of 52.7, following a final reading of 50.9 in the previous month.
Safe-Haven Demand Supports Yen Amid Trade Tensions
The Japanese Yen also finds support from safe-haven flows as global trade tensions escalate. On Wednesday, the US Customs and Border Protection announced new tariffs of 10% on imports from both Hong Kong and mainland China, further intensifying the US-China trade dispute and driving investors toward safer assets like the Yen.
Euro Under Pressure Amid Potential US Tariffs
The Euro (EUR) remains under pressure, weighed down by concerns over potential US tariffs on the Eurozone. Over the weekend, US President Donald Trump stated he would “definitely” impose tariffs, accusing the European Union of unfair trade practices, including not purchasing enough US cars and agricultural products. Trump claimed that the EU benefits disproportionately from trade, saying the EU “takes almost nothing, and we take everything from them.”
In response, French President Emmanuel Macron warned that the European Union would retaliate if its commercial interests were threatened. “If our commercial interests are attacked, Europe, as a true power, will have to assert itself and respond,” Macron stated.
Outlook: Further Downside Risks for EUR/JPY
Looking ahead, EUR/JPY faces additional downside risks as the Japanese Yen continues to gain support from rising wages, a solid economic outlook, and safe-haven demand. Meanwhile, the Euro could remain under pressure amid growing concerns over US trade policies and potential tariffs on the Eurozone. Investors will be closely watching any developments regarding the BoJ’s monetary policy and the US-EU trade relationship.
