EUR/JPY 2026: Why the Euro-Yen exchange rate is struggling at historic levels

2026-01-04 13:39:48

The euro-yen exchange rate experienced an unprecedented year in 2025. At 180.57 JPY on November 24, the pair is close to its all-time high – an increase of over 10% since the beginning of the year. But this record high also carries risks. While the interest rate differential between the ECB and the Bank of Japan fuels the rally, dark clouds are gathering on the horizon. What’s coming in 2026?

The Divergence of Central Banks: The Driving Force Behind EUR/JPY

The story of the euro-yen exchange rate last year is essentially a tale of two different monetary policies.

The Bank of Japan: Ultra-Conservative in Pace

The BoJ moves at a snail’s pace. After the first rate hike in July 2024 (to 0.25%), the next step to 0.5% followed only in January 2025. Six consecutive meetings later, it remains there. Analysts expect a rise to 0.75% in December 2025 – but this is also a gradual, cautious path. By 2026, the market expects a maximum of 1.0%, while experts estimate the neutral rate at 1.0-2.5%.

The ECB: Rate Cuts Completed

A completely different picture in the Eurozone. The ECB has lowered its key interest rate from 4.75% to currently 2.0% – an aggressive normalization. Since July 2025, it has held there, and no one expects movement in 2026. The result: an interest rate differential of about 150 basis points in favor of the euro.

This gap acts as a steroid injection for carry trades. Investors borrow cheaply in yen and invest in euro assets – as long as volatility remains low, this game works splendidly.

What Else Is Driving the Euro-Yen Higher?

Three structural factors currently support the EUR/JPY rate:

1. Japan’s Economic Problems

Japan is shrinking. The population fell by 908,574 people in 2024 – the 16th consecutive year. Birth rates plummeted to 686,061 (the lowest since 1899). With 29.1% over 65 years old, Japan is the oldest country in the world. The working population will fall from today’s 73.7 million to under 60 million by 2040.

Economically, this means: less growth, higher social costs, dangerously high national debt (237% of GDP). This structurally weakens the yen.

2. Europe’s Relative Stability

The Eurozone is not perfect, but stable. 2024: 0.9% growth, 2025 forecast at 1.3%. Inflation has returned to the 2% target (October: 2.1%). Spain and Portugal are even booming. Germany stagnates at (0.01% in 2024), but there are fewer existential threats than in Japan.

3. The Economic Stimulus Paradox

In November 2025, Japan announced a package of about $135 billion. Paradoxically: instead of fighting inflation, it will likely entrench it – meaning the BoJ cannot become more aggressive. This further weakens the yen.

Technical Analysis: Entering New Terrain

The euro-yen exchange rate is in uncharted territory. There are no reference points.

Support Levels (Protection Downward):

177.88 (200-day moving average)
175.77 (Swing level)
170.00 (Psychological threshold)

Resistance Levels (Ceiling Upward):

181.44 (Fibonacci 61.8%)
183.83 (Fibonacci 161.8%)
185.00 (Psychological threshold)

The RSI is at 57.32 – bullish but not overbought. However, the MACD shows a bearish crossover. Moving averages point upward, but uncertainty is growing. No historical signals provide guidance here.

What Could 2026 Bring?

Three scenarios shape the outlook:

Bullish (EUR/JPY → 190): The BoJ remains hesitant, the ECB holds or even hikes further. The interest rate differential remains king. The carry trade continues.

Base Scenario (EUR/JPY → 170-180): The BoJ raises rates to 1.0%, the ECB stays put. Slight consolidation, but no major break. The euro-yen moves sideways or slightly higher.

Bearish (EUR/JPY → 155-165): The ECB unexpectedly cuts rates, the BoJ surprises with rate hikes. A stock market crash triggers carry trade unwinding. The yen becomes a safe haven.

The Real Risks

Dangerous for Euro Bulls:

The BoJ becomes more aggressive than expected
Global recession → flight into yen as a safe asset
Stock market crash causes carry trades to unwind
The ECB must unexpectedly cut rates

Dangerous for Yen Bulls:

The ECB keeps rates high longer
The BoJ remains more passive
Japan’s economy stabilizes
Carry trades remain attractive during calm periods

The Conclusion for 2026

The euro-yen exchange rate stands at a crossroads in 2026. The fundamentals point to the euro in the medium term – Japan’s structural problems are not gone. But valuations are historically high. An EUR/JPY of 180+ is abnormal. This means: the next big move could go in any direction.

Traders should watch three things:

BoJ decisions: Every rate move changes the equation
Stock market volatility: Carry trades are volatile instruments
Economic data: From both the Eurozone and Japan

Long positions should have a clear stop level (probably 175-177). Shorts require patience – the trend is not broken yet. 2026 will be decisive: either EUR/JPY consolidates above 185, or it falls back to 165-170. In between, it will be dynamic.

Frequently Asked Questions about Euro-Yen

How strongly does BoJ policy influence EUR/JPY?

Significantly – but not in isolation. Higher yen interest rates strengthen the currency, but only relative to ECB policy. The 150 basis point difference is the real signal.

What happens to EUR/JPY in a stock market crash?

The yen becomes a safe haven. Carry trades implode. EUR/JPY falls quickly – possibly below 170 in a short time.

Is EUR/JPY 180+ sustainable?

Short-term yes, medium-term uncertain. Without a massive delay by the BoJ or ECB support, 180+ will come under pressure.

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