EUR/JPY Analysis: 10-Year Bond Yields, Interest Rate Differentials, UIP, and Carry Trade
1. Current Bond Yields and Interest Rate Differentials
Eurozone 10-Year Yield: ~2.50% (Germany’s benchmark yield, down 3bps post-ECB rate cut) .
Japan 10-Year Yield: ~1.45% (recently fell to a 3-week low amid strong bond auctions) .
Yield Spread:
2.50% (EUR)−1.45% (JPY)=+1.05%
The Eurozone’s higher bond yield provides a carry advantage for EUR.
Policy Rate Differential:
ECB Deposit Rate: 2.00% (cut by 25bps on June 5, 2025) .
BoJ Rate: 0.50% (unchanged since March 2025) .
Rate Spread:
2.00% (EUR)−0.50% (JPY)=+1.50%
2. Uncovered Interest Rate Parity (UIP)
Theory: The EUR should depreciate against JPY to offset the +1.50% rate spread, eliminating arbitrage opportunities.
Reality: UIP often fails due to risk premiums and market dynamics. Despite the Eurozone’s higher rates, EUR/JPY remains supported by carry trade demand and JPY weakness tied to BoJ policy.
3. Carry Trade Dynamics
Mechanics: Borrow JPY (0.5% rate) to invest in EUR assets (2.0% rate), profiting from the +1.50% rate spread and +1.05% yield spread.
Current Viability:
Opportunity: The yield and rate differentials favor EUR, making the carry trade attractive.
Risks:
ECB Dovishness: Further rate cuts (markets price ~28% chance of a July cut) could narrow the spread.
BoJ Policy Shifts: Japan’s Ministry of Finance may reduce long-term bond issuance to curb yields , while the BoJ continues tapering bond purchases , limiting JPY weakness.
Trade Tensions: U.S. tariff policies cited by the ECB and BoJ could heighten volatility.
Key Data for JPY (Japan)
June 6:
2-Year JGB Auction: Yield at 0.691% (prev. 0.68%), signaling stable short-term debt demand.
3-Month Bill Auction: Reflects liquidity conditions and BoJ policy expectations.
Bank Lending YoY: Steady growth indicates domestic credit demand.
June 10:
PPI YoY: 4.0% (prev. 4.2%), easing input price pressures but still above BoJ’s 2% target.
June 11:
Machine Tool Orders YoY: 7.7% (prev. 8.1%), indicating slowing industrial demand amid global trade risks.
4. Key Economic Context
Eurozone: ECB cut rates to 2.00% but kept future easing options open, citing trade tensions and revised inflation forecasts (2.0% for 2025) .
Japan: BoJ held rates at 0.5% in May 2025, slashing GDP growth forecasts (0.5% for FY2025) due to trade risks .
Summary Table
Metric Eurozone (EUR) Japan (JPY)
10-Year Bond Yield 2.50% 1.45%
Policy Rate 2.00% 0.50%
Yield/Rate Spread +1.05% (bond), +1.50% (policy) —
Carry Trade Bias Bullish for EUR Bearish for JPY
Key Risks ECB dovishness, trade tensions BoJ yield control, fiscal sustainability
Conclusion
EUR/JPY Outlook: Moderately bullish for EUR due to yield and rate advantages, but UIP suggests potential long-term EUR depreciation.
Carry Trade: Profitable if ECB maintains rates and JPY remains weak, but monitor ECB guidance (July meeting) and BoJ bond issuance plans.
Trade Strategy: Favor EUR longs on dips toward demand floor.
1. Current Bond Yields and Interest Rate Differentials
Eurozone 10-Year Yield: ~2.50% (Germany’s benchmark yield, down 3bps post-ECB rate cut) .
Japan 10-Year Yield: ~1.45% (recently fell to a 3-week low amid strong bond auctions) .
Yield Spread:
2.50% (EUR)−1.45% (JPY)=+1.05%
The Eurozone’s higher bond yield provides a carry advantage for EUR.
Policy Rate Differential:
ECB Deposit Rate: 2.00% (cut by 25bps on June 5, 2025) .
BoJ Rate: 0.50% (unchanged since March 2025) .
Rate Spread:
2.00% (EUR)−0.50% (JPY)=+1.50%
2. Uncovered Interest Rate Parity (UIP)
Theory: The EUR should depreciate against JPY to offset the +1.50% rate spread, eliminating arbitrage opportunities.
Reality: UIP often fails due to risk premiums and market dynamics. Despite the Eurozone’s higher rates, EUR/JPY remains supported by carry trade demand and JPY weakness tied to BoJ policy.
3. Carry Trade Dynamics
Mechanics: Borrow JPY (0.5% rate) to invest in EUR assets (2.0% rate), profiting from the +1.50% rate spread and +1.05% yield spread.
Current Viability:
Opportunity: The yield and rate differentials favor EUR, making the carry trade attractive.
Risks:
ECB Dovishness: Further rate cuts (markets price ~28% chance of a July cut) could narrow the spread.
BoJ Policy Shifts: Japan’s Ministry of Finance may reduce long-term bond issuance to curb yields , while the BoJ continues tapering bond purchases , limiting JPY weakness.
Trade Tensions: U.S. tariff policies cited by the ECB and BoJ could heighten volatility.
Key Data for JPY (Japan)
June 6:
2-Year JGB Auction: Yield at 0.691% (prev. 0.68%), signaling stable short-term debt demand.
3-Month Bill Auction: Reflects liquidity conditions and BoJ policy expectations.
Bank Lending YoY: Steady growth indicates domestic credit demand.
June 10:
PPI YoY: 4.0% (prev. 4.2%), easing input price pressures but still above BoJ’s 2% target.
June 11:
Machine Tool Orders YoY: 7.7% (prev. 8.1%), indicating slowing industrial demand amid global trade risks.
4. Key Economic Context
Eurozone: ECB cut rates to 2.00% but kept future easing options open, citing trade tensions and revised inflation forecasts (2.0% for 2025) .
Japan: BoJ held rates at 0.5% in May 2025, slashing GDP growth forecasts (0.5% for FY2025) due to trade risks .
Summary Table
Metric Eurozone (EUR) Japan (JPY)
10-Year Bond Yield 2.50% 1.45%
Policy Rate 2.00% 0.50%
Yield/Rate Spread +1.05% (bond), +1.50% (policy) —
Carry Trade Bias Bullish for EUR Bearish for JPY
Key Risks ECB dovishness, trade tensions BoJ yield control, fiscal sustainability
Conclusion
EUR/JPY Outlook: Moderately bullish for EUR due to yield and rate advantages, but UIP suggests potential long-term EUR depreciation.
Carry Trade: Profitable if ECB maintains rates and JPY remains weak, but monitor ECB guidance (July meeting) and BoJ bond issuance plans.
Trade Strategy: Favor EUR longs on dips toward demand floor.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.