The currency pairing of the euro (EUR) and Japanese yen (JPY) is considered one of the most commonly traded currency crosses in the global foreign exchange marketplace. Both rank among the top eight global currencies in terms of liquidity, earning each the designation of "major." With respect to total volume traded on the forex market, the euro accounts for 39.1% and is ranked second to only the United States dollar (USD). Forex trading involving the yen constitutes 19% of total volume, earning a global rank of third behind the U.S. dollar and the euro.
The relationship between Japan and the countries of the EU provides an avenue for considerable trading activity. Japan's economy is largely export-driven, ranking fifth globally for the year end 2015. Much of this ranking is due to the trade relationship with the EU, because Japan is its second-largest trade partner in Asia.
Technically, neither the EUR nor the JPY is considered to be a commodity currency. Even though both nations are dependent upon raw material imports such as crude oil, strong industrial diversity promotes conventional valuations. Monetary policy decisions from the Bank of Japan (BoJ) and European Central Bank (ECB) are key components of the evolving EUR/JPY exchange rate. This valuation model is in contrast to that of commodity dollars (NZD, AUD, CAD) or cryptocurrencies.
Impact Of Trade Balances
However, political relations, tariffs and the aggregate economic situation in Europe from 2005 to 2015 led to the EU consistently running a negative trade balance with Japan. For the years 2005 to 2011, the trade relationship produced an average annual negative balance of £28,741 million to the EU. As the Japanese exporting sector and overall economy became stagnant, the trade balance realised by the EU decreased to an average annual figure of £4,600 million for the period of 2012 to 2015.
In the face of this one-sided trade balance, the governments and companies of the EU and Japan have engaged in numerous agreements, associations and conferences to promote goodwill. Dating back to 1984, the EU and Japan have engaged in annual summit meetings that directly address issues that impact free trade and investiture between the two bodies. In addition to these summits, several endeavours are actively promoted by leadership in Japan and the EU:
- Pursuit of a comprehensive Free Trade Agreement (FTA),
- Development of the EU-Japan Business Roundtable (BRT),
- Participate in the Asia-Europe Meeting (ASEM).
Since the introduction of the euro in 1999, the EUR/JPY pairing has faced several periods of dramatic trend and enhanced volatility. The global financial crisis of 2008 saw a steep depreciation of the EUR/JPY. As the "credit crunch" became a global phenomenon during the 2007 to 2009 period, the EUR/JPY fell from 169.78 in July 2008 to a low of 115.00 February 2009.
In effect, the downtrend of the EUR/JPY brought on by the 2008 crisis proved to be a 30% appreciation of the JPY, and it exhibited why investors have historically seen the JPY as a "safe haven" currency. The designation of safe haven refers to the fact that Japan's economy is somewhat insulated from challenges facing the world debt market, and becomes an outlet for investiture during periods of global crisis.
Typically, as challenges face global economies, Japanese institutional investors divest internationally, choosing to hold their capital in domestic yen. It's common for international investors to follow suit, and the ensuing result is a bump in the value of the yen against other major currencies. The global economic crisis of 2008 is an illustration of the JPY acting as a safe haven for investors.
Impact Of COVID-19 Pandemic
As a general rule, the EUR/JPY trades with much smaller volumes than traditional forex majors such as the EUR/USD. The reduced market depth can lead to dramatic intraday swings in pricing. However, on longer time horizons, the EUR/JPY is capable of trading in a relatively stable fashion. A prime example of this phenomenon occurred during 2020's coronavirus pandemic.
During the chaotic month of March, the EUR/JPY currency pair only lost 45 pips (-0.38%), while posting a 502 pip range. This exchange rate fluctuation was much less than that of the EUR/USD, which settled near flat (+0.05%) after a massive 836 pip monthly range. Given its propensity to consolidate over the intermediate or long-term, trading strategies using pivot points or reversion-to-the-mean methodologies are frequently implemented on the EUR/JPY.
In contrast to demand for safe-havens surrounding the COVID-19 outbreak, periods during which the Japanese government takes political action to jumpstart the economy have given a boost to the valuation of the EUR/JPY. An example is the December 2012 election of Japanese Prime Minister Shinzo Abe, and the institution of his "Abenomics" plan for boosting the Japanese economy. Abenomics consisted of a three-pronged approach to stimulate the Japanese economy: a massive fiscal stimulus, zero-to-sub-zero interest rates from the BoJ and the adoption of structural economic reform.
Despite fostering a long-term rally in the Nikkei equities index, Abenomics brought on a sustained devaluation of the yen against the euro. In anticipation of the 2012 election and the possibility of Abenomics, investors preferred to hold euros instead of yen, causing the EUR/JPY to rise from 98.75 on July 1, 2012, to a high of 118.82 on January 1, 2013.
This six-month period surrounding the election of Abe and the anticipation of a new, aggressive monetary policy for Japan ended with a substantial 20% loss in value of the yen against the euro. Ultimately, the pressure placed upon the yen by the institution of Abenomics drove the EUR/JPY to a high of 147.09 in November 2014, before returning to 2012 levels in the wake of the UK's "Brexit" vote in June 2016.
Although many cite Abenomics as being a success for Japan's financial markets, the impact on the JPY was bearish. Nonetheless, a bullish trend in the Nikkei 225 from 2011 to 2020 was in part a product of Abe's economic policies. In fact, led by the United States, most developed nations turned to the principles of Abenomics to combat the fiscal impact of COVID-19. As a result, the world's leading equities indices such as the S&P 500 and Nasdaq Composite reached record highs repeatedly during 2020.
Past Performance: Past Performance is not an indicator of future results.
Key Facts: EUR/JPY
- Currency overview: The euro is the official currency of the European Union. It has the largest circulation among currencies in the region and serves alongside the U.S. dollar and the Japanese yen as a major world reserve currency.
- Central bank: European Central Bank
- Currency code: EUR
- History: The euro was introduced in 1999 as the official currency of the eurozone, replacing the traditional currencies of 19 nations in the region.
- Economy: The eurozone economy is the largest economy of a supra-national economic bloc in the world, with a GDP of approximately €15 trillion.
- Currency subunits: 1 cent = 1/100 of a euro
- Denominations: Bills: €5, €10, €20, €50, €100, €200 and €500; Coins: 1c, 2c, 5c, 10c, 20c, 50c, €1 and €2.
- Countries and territories using the euro: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. Also, Andorra, Monaco, San Marino and the Vatican use the currency under an agreement with the European Union. Two other countries, Kosovo and Montenegro, have adopted the currency unilaterally without an agreement.
- Currencies pegged to the Euro: Benin franc, Bosnia and Herzegovina mark, Bulgaria lev, Burkina Faso franc, Cameroon franc, Central African Republic franc, Chad franc, Denmark krone, Equatorial Guinea franc, Gabon franc, Guinea-Bissau franc, Ivory Coast franc, Mali franc, Niger franc, Republic of the Congo franc, Senegal franc and Togo franc.
Japanese Yen (JPY)
- Currency overview: The Japanese yen is the most frequently traded currency in Asia, and trades with the third-highest volume globally. Yen valued at nearly US$1 trillion is currently in global circulation. This valuation ties the yen with the USD for second globally, behind the euro.
- Currency code: JPY
- Central bank: Bank of Japan
- History: The creation of the yen is credited to the Meiji Restoration period, dating back to the mid-19th century. The New Currency Act of 1871 centralised and created a uniform monetary system in Japan, similar to the European currency structures of the day. In 1882, the Bank of Japan was created. It became the Japanese central bank, and consolidated the 153 national banks of Japan. In 1949, as a result of WWII, the yen was pegged to the dollar on a 1:1 basis according to the new Bretton Woods monetary system. This exchange rate remained in place until 1971.
- Economy: The Japanese economy is largely export driven, thus the governmental practice of periodically devaluing the yen to favour the export sector has been prevalent in Japan dating back to the early 1990s. When measured in terms of GDP purchasing power parity (PPP), Japan ranks as the fourth largest economy in the world.
- Currency subunits: No subunits of yen exist.
- Denominations: Banknotes: ¥1000, ¥2000, ¥5000, ¥10000; Coins: ¥1, ¥5, ¥10, ¥50, ¥100, ¥500.
- The Japanese yen is the national currency of Japan, with no other countries exclusively pegging to or directly using the yen as their domestic currency.
- Currency pairings commonly associated with the yen are EUR/JPY and JPY/AUD. The yen is considered a "major" pairing when coupled with the U.S. dollar (USD/JPY).
This article was last update on 5th January 2021.
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…