The EUR/JPY pair dipped to approximately 185.55 during Monday’s early European session. This decline followed Japan’s ruling Liberal Democratic Party’s (LDP) overwhelming victory in the lower house elections, with the Yen gaining strength against the Euro.
The LDP secured a supermajority, the largest in post-war Japan, which initially weakened the yen. Despite the victory, concerns about Japan’s high public debt might pressure the Yen, while plans to cut sales tax on food could further complicate fiscal policy.
European Central Bank Approach
The European Central Bank has maintained its interest rate at 2.0% for five consecutive meetings. ECB President Lagarde emphasised a data-dependent and meeting-by-meeting approach, aligning with economists’ expectations for stable rates throughout 2026.
The value of the Japanese Yen is influenced by several factors, including the Bank of Japan’s policies and Japanese-US bond yield differentials. Historically, the BoJ’s ultra-loose monetary policy has contributed to Yen depreciation, though recent reversals of these policies have lent support to the Yen.
In times of market stress, the Yen is considered a safe haven, prompting increased demand. Changes in broader risk sentiment can significantly impact the Yen’s value against other currencies.
The landslide LDP victory in Japan has introduced some clear short-term strength to the Yen, pushing the EUR/JPY cross down towards 185.50. We saw traders initially react to the expected result before profit-taking brought the Yen stronger, a classic market response to confirmed news. This political stability now provides a solid anchor for the currency in the immediate future.
Impact of Bank of Japan Policies
This move continues a trend that has been building since the Bank of Japan started to pivot away from its ultra-loose monetary policy, which we saw begin back in 2024. That slow normalization has been gradually closing the interest rate differential that once heavily favored the Euro. This underlying policy shift remains the most significant long-term support for the Yen.
Meanwhile, the European Central Bank appears firmly on hold with its benchmark rate at 2.0%. After seeing Eurozone inflation fall from the peaks of 2023 to a more manageable 2.1% in the latest January 2026 figures, there is little incentive for them to change course. This leaves the Euro without a strong, independent catalyst for a major rally.
The primary risk to a stronger Yen is Japan’s own fiscal situation, which we must continue to monitor. With Japan’s debt-to-GDP ratio finishing 2025 above 260%, the new government’s spending plans could spook bond markets. Any signs of stress in Japanese government bonds would be a key indicator of a reversal.
For derivatives traders, this suggests that selling into any rallies in the EUR/JPY pair could be a viable strategy over the coming weeks. Given the background risk of Japan’s debt, buying puts on EUR/JPY provides a position to benefit from further Yen strength while strictly defining your maximum loss. The tension between Japan’s political stability and its fiscal weakness will likely create volatility, making options a valuable tool.
