EUR/JPY in 2025: Opportunity in Yen as the Yield Differential Narrows

The monetary struggle between Japan and the Eurozone is transforming the foreign exchange market. In 2025 so far, the euro-yen pair has experienced extreme volatility, with movements exceeding eight yen in just four months. From 161.7 ¥ at the start of the year to a low of 155.6 ¥ on February 27, and reaching 164.2 ¥ on May 1, the current quote hovers around 163.4 ¥. This fluctuation reflects a profound change in interest rate dynamics and global risk perception.

The Cycle Shift in Monetary Policies

The Bank of Japan marked a turning point by raising its benchmark rate from 0.25% to 0.50% in January, reaching the highest level since 2008. This move was not isolated. While Tokyo tightens its stance, the European Central Bank has reduced its deposit facility from 4% to 2.25% through three consecutive cuts (January 30, March 12, and April 17). The eurozone is cooling due to economic slowdown and declining inflation, justifying these cuts. Simultaneously, the BoJ anticipates further hikes to 0.75% in summer and 1% in autumn.

This policy divergence is the most important structural factor to understand where the yen is heading in the short and medium term. The Japanese yield curve clearly discounts an upward trajectory of rates, while European investors face an opposite dynamic.

When Fear Dominates: The Yen as a Safe Asset

US tariffs announced in February (general duty of 10% on imports and an additional 20% for EU goods) triggered risk aversion. The EUR/JPY pair plunged to 155.6 ¥ within days. This behavior is no coincidence. Japan, as a major global creditor without dependence on external capital flows, inspires confidence during turbulence. Additionally, there is a powerful structural mechanism: many investors finance themselves in yen at low cost to buy more profitable assets in other currencies. When markets tense, these loans are quickly liquidated, generating massive demand for yen.

The Japanese forex market is also the most liquid in Asia, allowing large-volume purchases without excessive price movements. Therefore, during geopolitical or financial crises, the yen is almost always the first destination for scared capital.

Chinese Stimulus and Risk Appetite Recovery

In May, Beijing injected liquidity by lowering its 7-day repo rate to 1.40% and increasing the reserve requirement ratio for banks. This stimulus revitalized Asian stock markets and reactivated appetite for higher-yield assets. Investors stopped buying yen en masse, weakening the currency and allowing EUR/JPY to surge to 164.2 ¥ on May 1. The lesson is clear: when fear recedes and markets gain confidence, the yield differential between (more profitable assets) and yen becomes attractive again.

Technical Analysis: Signs of Exhaustion in the Rise

The daily chart shows EUR/JPY trading above its main moving average (approximately 161 ¥), confirming the upward trend since March. However, recent candles show narrow bodies and cluster near the upper Bollinger band (maximum 164.0 ¥; average 162.5 ¥), indicating weakening buying momentum.

The 14-session Relative Strength Index (RSI) stands at 56 after touching 67 last week. This decline from overbought levels, combined with a bearish divergence from the May 1 high, suggests a possible short-term correction. The Bollinger channel has narrowed significantly since March, a classic pattern that precedes sharp movements when the range expands again.

Supports are at 162.5 ¥ (Bollinger average), 161 ¥ (confluence with the moving average), and 159.8-160 ¥ as the weaker level. Main resistance remains at 164.2 ¥; a clear close above would open the door to 166-168 ¥.

Year-End Forecasts Overview

Financial institutions offer varied but converging projections:

These forecasts reflect different methodologies: some portals calculate specific monthly ranges, others provide broad annual bands based on algorithms, and some publish point estimates for year-end. The key point is that almost all place the 2025 close between 160 and 173 ¥.

Base Scenario: EUR/JPY Near 162 ¥

Our analysis suggests the pair will fluctuate within a broad range but with a slight downward tilt toward year-end. When markets breathe easy and risk appetite returns, the euro should face resistance above 165 ¥. When shocks occur—strong US inflation data, new tariff rounds, or stock corrections—the yen will regain its protective role and could push the pair toward 158-160 ¥.

The base scenario places EUR/JPY near 162 ¥ at the end of 2025, with a slight bias toward a stronger yen if the BoJ confirms its rate hike cycle continues into 2026.

Practical Strategies: How to Position

Short Term (3-6 months): The pair has been moving within a 160-170 ¥ channel since the beginning of the year. Each time it approaches 165-170 ¥, it makes sense to sell euros and buy yen with targets at 162 ¥ and disciplined stops above 171 ¥. Days before BoJ meetings, quick oscillations of 1-2 yen occur; active traders can capitalize on these with futures or options structures.

Medium Term (end of 2025): Projections converge at 160-170 ¥. A prudent tactic is to accumulate yen in tranches, buying whenever the pair exceeds 163-164 ¥, averaging entry prices and reducing risk. Those needing euro flow hedges can lock in forwards or yen deposits near current levels; costs decrease as the rate differential narrows.

Profit Taking: If the pair approaches 160-162 ¥ after BoJ hikes expected in summer and autumn, it’s advisable to take at least part of the gains, keeping some as protection against geopolitical turbulence that historically favors the yen.

Risks to Watch

An unexpected pause by the BoJ if Japanese inflation subsides, an unforeseen rise in European core inflation that halts ECB cuts, or a sustained stock rally returning the carry trade could push the pair toward the upper range.

New tariff rounds between the US and EU would activate the safe-haven yen, pressuring EUR/JPY toward 158-160 ¥. Conversely, any gesture of détente could lead to rebounds toward 167-168 ¥. Maintaining clear stops and reviewing exposure after each central bank meeting remains essential.

Historical Context: Two Decades of EUR/JPY

Since 1999, this pair has mirrored the yen’s strength during crises and euro’s challenges. In 2008, the yen strengthened as a safe haven while the euro depreciated amid eurozone instability. The subsequent decades saw a gradual euro appreciation fueled by European economic recovery and BoJ expansionary policies. Today, with the BoJ raising rates and the ECB cutting, the pair again trades between 160-165 ¥, reflecting the tug-of-war between a yen regaining its safe-haven role and a euro under slowdown pressure.

Conclusion: The Cycle Shift is Real

Projections for 2025 close converge in a 158-170 ¥ range, reflecting a market that is finally embracing the monetary cycle change. The yield differential, which a year ago was around two percentage points, will be reduced to just over one, cutting the classic incentive to borrow cheaply in yen to buy expensive euros.

The main structural bias has flipped in favor of the yen for the first time in nearly two decades. The carry trade, where investors borrow a low-yield currency and convert it into a higher-yielding one, ceases to be a one-way street. This reality suggests a gradual downward trend for the EUR/JPY pair for the rest of the year.

With euro-yen still bouncing between 160 and 170 ¥, it’s a good time to buy yen on rebounds toward 165-170 ¥, aiming for 160-162 ¥ as a target and maintaining risk controls at 171 ¥. The window to build a yen position with reasonable expectations of moderate revaluation is open.