Japan FX Key Drivers Boosting EUR JPY

Citi Research analyzes the structural shifts in EUR/JPY price formation, highlighting that Japanese equity performance has replaced interest rate spreads as a primary driver. The EUR/JPY appears slightly undervalued by current models, potentially due to official Japanese JPY-buying interventions.

Key Takeaways

• 1.The EUR/JPY is currently evaluated at around ¥191/€ based on Citi's two-tier model, suggesting potential undervaluation.
• 2.Historical gains in Japanese equities have been a primary driver boosting EUR/JPY, while the impact of interest rate spreads has diminished.
• 3.Japanese government JPY-buying interventions may be contributing to the current undervaluation relative to the model estimates.

Table of Contents

• CITI'S TAKE
• Structural change in price formation for EURJPY
• EURJPY double decker model (analysis period: 2023-25)
• Change in price formation mechanism
• Using both double decker models
• Appendix A-1

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