EUR/JPY declines as Yen strengthens on trade tensions, Eurozone political uncertainty

• The EUR/JPY pair declines, pressured by a stronger Japanese Yen.
• Rising trade tensions between the United States and China support demand for safe-haven assets.
• The suspension of France's pension reform adds to political uncertainty in the Eurozone.

EUR/JPY trades lower around 176.00, down 0.13% for the day at the time of writing on Wednesday, as safe-haven flows continue to boost the Japanese Yen (JPY). The currency benefits from defensive demand amid escalating geopolitical tensions and persistent political instability in Europe.

The JPY strengthens despite weak Japanese Industrial Production data, which fell by 1.6% YoY in August, following a 1.3% decline in July. Although domestic data remain soft, heightened trade and political uncertainty underpins the Japanese Yen's appeal.

Tensions between Washington and Beijing have flared again after US President Donald Trump threatened additional targeted trade restrictions if China goes ahead with its new export controls on rare earth minerals and higher port fees for foreign container ships. In response, Beijing announced sanctions on several US-linked subsidiaries of South Korean shipbuilder Hanwha Ocean.

On the political front, investors closely watch Japan's leadership transition, as the ruling Liberal Democratic Party (LDP) leader, Sanae Takaichi, is expected to become the next Prime Minister following the coalition split with the Komeito party. Known for her support of expansionary Abenomics-style policies, Takaichi's expected appointment has fueled expectations of increased fiscal spending and continued loose monetary policy.

According to OCBC, "political uncertainty may delay the Bank of Japan's (BoJ) policy normalization, even though macro conditions justify a rate hike."

In Europe, French Prime Minister Sébastien Lecornu's decision to suspend the 2023 pension reform until after the 2027 presidential election has added to political uncertainty across the Eurozone. The move, aimed at easing long-standing social tensions, has raised concerns over the government's ability to maintain fiscal discipline.

According to ING, this suspension "reduces the immediate risk of a no-confidence vote but undermines long-term confidence in France's fiscal trajectory."

Eurostat data show that Eurozone Industrial Production fell by 1.2% in August on a monthly basis after a 0.3% rise in July, while increasing by 1.1% YoY. This mixed picture, combined with ongoing political instability in both Europe and Asia, continues to drive demand for safe-haven assets, keeping the Japanese Yen supported against the Euro (EUR).