Yen Weakness Drives EUR/JPY Higher Amid Japan's Political Uncertainty and BoJ Caution

EUR/JPY has extended its impressive rally, trading near 185.50 on Tuesday morning and marking a fresh multi-year peak at 185.54. The pair is up 0.50% on the day, continuing its upward trajectory for a third straight session. This surge stems from persistent Japanese Yen weakness, fueled by two major headwinds: mounting political uncertainty in Japan and the Bank of Japan’s deliberately cautious stance on monetary policy normalization.

Political Pressure Weakens the Yen

Japan’s political landscape is becoming increasingly unstable, with Prime Minister Sanae Takaichi considering an early general election potentially scheduled for February’s first half. This scenario raises market expectations for more expansionary fiscal spending, a development that typically undermines currency strength. The prospect of increased government spending adds to downward pressure on the JPY, reinforcing its weakness against major peers like the Euro.

BoJ’s Gradual Approach Limits Yen Appeal

Despite BoJ Governor Kazuo Ueda’s recent hawkish rhetoric—reiterating that rate hikes would continue if economic conditions align with forecasts—investors remain unconvinced about the actual timing of the next move. The central bank’s broadly cautious and gradual exit from ultra-loose monetary policy continues to weigh on the Japanese Yen’s safe-haven appeal. Without a clear roadmap for future tightening, the JPY struggles to attract carry trades or risk-off flows.

Geopolitical Tensions Add to Currency Pressure

Deteriorating Japan-China relations have further complicated the picture. Beijing’s recent restrictions on rare earth element exports to Japan over Taiwan-related tensions threaten Japanese supply chains and weigh on broader sentiment surrounding the currency. These external pressures compound the structural headwinds already facing the Japanese Yen.

Japanese Authorities Signal Caution on Weakness

Finance Minister Satsuki Katayama warned on Tuesday that excessive JPY depreciation remains a concern, noting she had raised this issue with US Treasury Secretary Scott Bessent. She stressed that Tokyo’s tolerance for one-sided Yen weakness is limited. Such verbal intervention could eventually help stabilize the currency and potentially curb EUR/JPY’s near-term upside momentum.

Euro’s Stability Amid ECB Hold Expectations

On the flip side, the Euro remains comparatively stable. The European Central Bank is widely expected to maintain interest rates in the coming months as inflation hovers near its 2% target. With monetary policy unlikely to shift materially, Euro strength is being driven primarily by global risk sentiment and the relative weakness of other currencies—particularly the Yen.

Currency Cross-Market Dynamics

Examining broader currency movements, the Euro has demonstrated notable strength against the Japanese Yen. For perspective on yen conversion dynamics, 1 million yen currently translates to approximately NZD values that reflect the substantial weakening of the Japanese currency versus multiple counterparts. The heat map of major currency pairs reveals that JPY is the weakest performer today, losing ground across nearly all major crosses as political and policy factors continue to drag on the currency.

In summary, EUR/JPY’s rally reflects a confluence of Yen vulnerability stemming from political uncertainty, cautious central bank policy, and regional tensions, while Euro stability provides a structural floor beneath the pair. Investors should monitor Japanese official communications and political developments for potential near-term turning points.