EUR/JPY extends rally as Yen falters on political uncertainty, BoJ caution

• The EUR/JPY exchange rate extends its advance for a third consecutive session.
• Political uncertainty in Japan and limited visibility on monetary policy weigh on the Japanese Yen.
• Global market sentiment remains the main driver of the Euro.

EUR/JPY trades around 185.50 on Tuesday at the time of writing, up 0.50% on the day, extending its upward move for a third consecutive session, hitting a new multi-year high at 185.54 earlier in the day. The pair mainly benefits from the weakening of the Japanese Yen (JPY), against a backdrop of political uncertainty in Japan and continued caution surrounding the normalization of the Bank of Japan’s (BoJ) monetary policy.

The Japanese Yen remains under pressure following reports that Japan’s Prime Minister Sanae Takaichi may call an early general election as soon as the first half of February. This prospect fuels expectations of a more expansionary fiscal policy, which tends to weigh on the Japanese currency. At the same time, the lack of a clear timeline for the next interest rate hike by the Bank of Japan continues to undermine the JPY, as markets view the central bank’s exit from its ultra-loose monetary policy as particularly cautious and gradual.

Despite a relatively hawkish tone, BoJ Governor Kazuo Ueda recently reiterated that the central bank would continue to raise interest rates if economic and price developments evolve in line with its forecasts. However, investors remain skeptical about the actual timing of the next move, limiting the Japanese Yen’s appeal as a safe-haven currency.

On the political and geopolitical front, the Japanese currency is also pressured by deteriorating relations between Japan and China. Beijing recently banned the export of certain rare earth elements to Japan following diplomatic tensions over Taiwan, increasing supply-chain risks for Japanese manufacturers and weighing on sentiment surrounding the JPY.

However, the recent decline in the Japanese Yen could prompt stronger verbal intervention from Japanese authorities. Japan’s Finance Minister Satsuki Katayama said on Tuesday that she had shared concerns about the JPY’s one-sided depreciation with US Treasury Secretary Scott Bessent, adding that tolerance for excessive weakness was limited. These comments could help curb further downside in the JPY in the near term and warrant some caution regarding the immediate continuation of EUR/JPY’s rally.

On the European side, the Euro remains relatively stable. The European Central Bank (ECB) is widely expected to keep interest rates unchanged in the coming months, with inflation now hovering close to the 2% target. In this environment, monetary policy is not a major catalyst for the single currency, whose performance continues to be driven mainly by global market sentiment and external factors.