Insights 
VT 
The Japanese Yen is under pressure as concerns over Japan’s fiscal health persist. Anticipation builds for Japan’s national inflation figures, which could influence the Bank of Japan’s future decisions. The yield gap continues to widen in favour of the Euro due to stable Eurozone interest rates.
On Thursday, EUR/JPY climbed to around 177.00, marking a 0.30% daily increase. The Japanese Yen weakens due to anxiety over Japanese public finances, with new Prime Minister Sanae Takaichi seen as favouring expansionary fiscal policies. Japan’s cabinet is drawing up a USD 90 billion stimulus plan, amidst concerns of its impact on the country’s debt.
Awaiting Consumer Price Index Release
Market participants await the release of Japan’s national Consumer Price Index for September. A robust CPI reading could uplift the Yen by fostering expectations for a BoJ rate hike.
In the Eurozone, ECB Vice President Luis de Guindos remarked that inflation risks are balanced, suggesting current interest rates are appropriate. The Yen’s weakness contributes to the EUR/JPY rise, with yield differentials favouring the Euro.
The Euro’s strength against the Japanese Yen continues, reflecting wider market trends as outlined in the currency percentage change table. Other currency pairs like USD/JPY and EUR/GBP show varied movements within the day.
The upward trend in EUR/JPY appears solid, primarily driven by the fundamental policy differences between Europe and Japan. With Japan’s public debt exceeding 260% of its GDP, the new $90 billion stimulus package signals further fiscal strain and Yen weakness. This macro environment strongly suggests that maintaining a bullish stance on the EUR/JPY pair is the logical path forward.
Strategy and Risk Management
For the next few weeks, we should be looking at buying call options on EUR/JPY, targeting strike prices comfortably above the current 177.00 level. This approach lets us capitalize on the expected continued ascent while strictly defining our risk to the premium we pay. It’s a measured way to ride the trend, especially with a key data point just hours away.
The immediate event to watch is Japan’s national CPI for September, due out later today. Recent inflation numbers, like the 2.8% core CPI we saw for August, have shown that price pressures are lingering but not yet forcing the Bank of Japan’s hand. A surprisingly strong inflation reading could cause a short-term pullback in EUR/JPY, which we should view as a better opportunity to enter or add to long positions.
This trade is fundamentally supported by the significant interest rate differential; the ECB’s main rate is holding at 3.5%, while Japan’s policy rate is only 0.1%. However, we must remain vigilant for any potential currency intervention from Japanese officials, similar to the actions they took back in late 2022 when the yen weakened sharply. Therefore, keeping an eye on implied volatility in options contracts is a sensible way to gauge market anxiety about such a move.
