Insights 
VT 
The EUR/JPY has risen close to 176.00 as Japan prepares for Sanae Takaichi to be confirmed as the new prime minister. The Japanese Yen weakened as the Liberal Democratic Party formed a coalition with the Japan Innovation Party to implement fiscal policies.
There is uncertainty about the new coalition’s stability and Takaichi’s potential hardline approach. Meanwhile, Bank of Japan board member Hajime Takata suggests it might be an appropriate time to raise interest rates, though they are anticipated to remain unchanged.
EUR/JPY Appreciation
The EUR/JPY cross experienced appreciation with a decline in safe-haven demand due to easing tensions between the United States and China. US President Donald Trump anticipates a “fair deal” with China’s President Xi Jinping, though disagreements on tariffs and technology persist.
The Euro faced pressure against major currencies following S&P Global Ratings’ downgrade of France’s credit rating from AA- to A+. This downgrade was attributed to budget uncertainty despite the submission of the 2025 draft budget by the French government.
Interest rates are set by central banks to influence lending and inflation. Higher rates often strengthen a country’s currency and can impact the price of gold by increasing the opportunity cost of holding it. The Federal Reserve uses the Fed funds rate to influence US monetary policy.
With EUR/JPY pushing towards 176.00, we are seeing a classic conflict for the Yen. The incoming government’s push for fiscal spending, which usually weakens a currency, is clashing with hints from the Bank of Japan about a potential rate hike. Japan’s core inflation recently printed at 2.1%, giving the central bank a reason to consider tightening, even if it holds off next week.
Investment Strategies
Traders looking to ride this upward momentum might consider buying EUR/JPY call options with strike prices around 177.00. This is a bet that the new government’s spending promises will outweigh the BoJ’s talk, further weakening the Yen in the short term. We’ve already seen the 10-year Japanese Government Bond yield tick up to 1.15% in anticipation of more government issuance to fund these policies.
However, there is significant uncertainty, which suggests a play on volatility could be prudent. We remember how the Yen surged unexpectedly in late 2023 when the BoJ adjusted its policy, so a surprise is always possible. A straddle, buying both a call and a put option, would profit from a large price swing in either direction if the new Prime Minister or the BoJ delivers a shock.
We must also consider the Euro’s own weakness following France’s credit downgrade by S&P. This puts a potential cap on how high the EUR/JPY can go, as concerns about Eurozone stability grow. The spread between French and German 10-year bond yields has already widened by 15 basis points to 65 basis points this month, signaling investor anxiety.
The broader market’s reduced demand for safe havens is also pressuring the Yen. As long as talks between the US and China appear to be constructive, investors are less likely to pile into traditional safety assets like the JPY. But we’ve seen since the trade wars began back in the late 2010s that sentiment can reverse on a single headline, making this a fragile support for the pair.
