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Analysts at Nomura explained that some currencies tend to be forgotten and have argue that  EUR/JPY is one of them.

Key Quotes:

“It has some attractive features. One has to be that both the euro area and Japan share many characteristics – such as having current account surpluses, being low yielders and having similar political stances on trade – which allows the differences to be magnified.”

“One notable difference is that Japan has higher short-term yields than the euro area, so being short EUR/JPY is actually positive carry.”

“Japanese investors have no incentive to buy euro area bonds currency unhedged, so any Japanese investor buying of euro area bonds is unlikely to see any net yen selling.”

“Longer-dated JGB yields rising on BOJ Perhaps a more important recent shift has been the Bank of Japan’s greater tolerance for JGB yields to rise especially beyond the 10yr sector of the yield curve. This makes longer-dated domestic Japanese bonds even more attractive than overseas bonds.”

“We have started to see the 20yr rate differential between the euro area and Japan correlate more closely with EUR/JPY than the 5yr rate differential  The rate spreads appear to have peaked, which could cap any EUR/JPY upside.”

“Outside of core rate trends, Japan does not share the same sovereign and bank risks as the euro area. Concerns on Italy’s fiscal path and broader troubles across euro area banks have weighed on the euro, and other safe-haven markets such as the dollar and the yen would naturally benefit. As expected EUR/JPY has shown a strong correlation with these factors, especially to relative bank sector performance.”

“Oil makes view slippy, but risks still for EUR/JPY downside The one factor that has clearly favoured the euro area over Japan has been the rise in oil prices. Japan’s terms of trade are more heavily affected by a rise in oil prices  On balance, ongoing euro area banking/sovereign risks, positive carry and the Bank of Japan allowing higher long-term yields would suggest EUR/JPY could head lower over coming months.”