EUR/JPY drops near 161.00 amid global trade war fears

One of the most popular trading instruments on the global forex market is the EUR/JPY pair. As this currency pair is often volatile, traders can capitalise on significant opportunities. This may help them achieve positive returns and potentially secure attractive profits in a short timeframe. On the other hand, the Yen is a low-yielding currency. It has historically acted as a safe-haven option in times of economic unrest.

About the Euro and Japanese Yen

The Euro was first introduced in 1999. Since then, it has been adopted as the official currency of 19 European Union (EU) member states. Denmark, Sweden, and Poland are among the member states that have not yet adopted the Euro. However, they are expected to do so in the future.

Since the introduction of the Euro, the currency has grown in popularity to become one of the world’s most important currencies.

In contrast, the Japanese Yen, which was first used in 1871, is also used as a reserve currency. It joins the US Dollar, Euro, and British Pound in this role. The Yen was one of the best-performing currencies in the world in 2018, demonstrating its popularity among forex traders.

EUR/JPY climbed above 161.50 on 12 March

During Wednesday’s Asian session on 12 March 2025, the EUR/JPY continued its upward trend for the second consecutive day. It was trading around 161.60.

The currency pair gained strength as the Japanese Yen (JPY) weakened. This came amid worries that US President Donald Trump may impose new tariffs on Japan.

President Trump reversed his decision to double tariffs on Canadian steel and aluminum to 50%, a move he announced on Tuesday. His reversal boosted market confidence.

However, the White House told Reuters that a 25% tariff on all imported steel and aluminum will still go into effect on Wednesday. This move will affect key US trade partners, including Canada and Mexico.

Nevertheless, the JPY’s downside may be cushioned as Japanese government bond (JGB) yields recently increased to a multi-year high of 1.5712. This rise comes amid expectations of additional rate hikes by the Bank of Japan (BoJ).

BoJ Governor Ueda stated that it is normal for long-term interest rates to adjust based on market expectations for future short-term rates. He emphasised the importance of clear communication regarding policy decisions. The BoJ, which hiked interest rates to 0.5% in late January, has scheduled its next policy meeting for next week.

Japan’s top firms agree to big wage hikes

For the third consecutive year, Japan’s largest companies are set to offer significant wage hikes. According to Reuters, the goal is to help workers manage inflation and address labour shortages. Rengo, Japan’s largest labour union umbrella group with 7 million members, is calling for a 6.09% wage increase.

This is the highest in 32 years and exceeds last year’s 5.85% increase. Record-breaking wage increases have already been agreed by companies like Denso.

Germany’s fiscal and defence policies boost Euro confidence 

The Euro gained strength against the Yen, buoyed by increasing optimism on Germany’s fiscal and defence policies. The Euro has outperformed its peers. This comes as the German Green Party, led by Franziska Brantner, supports approving a defence spending deal. Lawmakers will soon discuss the proposal.

This move comes as German leaders agreed to ease the borrowing cap, also known as the ‘debt brake.’ They also set a €500 billion infrastructure fund to boost defence spending and stimulate economic growth in the country.

Germany’s fiscal plans have also led traders to reconsider their expectations for the European Central Bank (ECB) to implement two additional rate cuts by the summer. ECB policymaker and Bank of Finland Governor Olli Rehn noted that core inflation indicators suggest inflation is expected to align with the ECB’s 2% target.

EUR/JPY declines on 13 March after two consecutive gains

After two consecutive sessions of gains, the EUR/JPY declines as the Japanese Yen strengthens. On Thursday 13 March, during Asian hours, the EUR/JPY was trading around 161.10. A stronger Japanese Yen, which is gaining from increased demand for safe-haven assets, is causing the weakness of the currency cross.

The JPY remains supported by expectations of additional interest rate hikes this year by the Bank of Japan (BoJ), driven by persistent wage growth and inflation.

Japanese Finance Minister Shunichi Kato cautioned on Thursday that the country has not yet fully recovered from deflation, pointing out that Japan’s economy is experiencing a supply shortage rather than weak demand.

As Germany’s plans for a large increase in state borrowing runs into new hurdles traders continue to remain cautious. On Wednesday, a co-leader of the Green party remained non-committal on reaching a deal, while the far-left party filed another legal challenge.

Meanwhile, election winner Friedrich Merz is pushing to pass debt reforms and establish a €500 billion ($545 billion) infrastructure fund before the departing parliament dissolves. According to Reuters, the success of these plans depends on backing from the Greens and court decisions may also present potential roadblocks

Factors that can influence EUR/JPY movements

Interest rates, economic performance, political tensions, and international trade levels are major factors that can influence the movements of the EUR/JPY pair.

Interest rates

They can have a big impact on the EUR/JPY exchange rate. When the European Central Bank (ECB) increases interest rates, it can attract foreign investors who are looking for higher returns on their investments. As a result, demand for the Euro increases and its value strengthens relative to the Japanese yen. On the other hand, lower interest rates in the Eurozone can lead to a decline in demand for the euro and a depreciation of its value against the yen.

Economic performance

The economic performance of Japan and the Eurozone can also impact the EUR/JPY pair. Positive economic data, such as strong GDP growth, low unemployment rates, and positive inflation figures, can increase investor confidence and attract foreign capital into a country, strengthening its currency. Similarly, weak economic indicators can result in a devaluation of the respective currency.

Political tensions

Political tensions and developments can greatly impact the EUR/JPY pair. A stable political environment and a favourable business climate attract foreign investors, leading to a stronger currency. On the other hand, political unrest or conflicts can make investors withdraw their investments, which would weaken the currency.

The Japanese Yen is often considered a ‘safe haven’ currency. This means that during political or economic uncertainty, investors often move their assets to the JPY, which can increase its value relative to the euro.

International trade levels

International trade levels are another important factor. The EUR/JPY pair can be influenced by changes in international trade patterns and policies. Higher levels of international trade can boost economic growth and increase demand for both currencies. Changes in trade policies or protectionist measures can affect trade levels, and in turn, the exchange rate between the euro and Japanese yen.

Also, the policies and interventions of the Bank of Japan (BoJ) can have a notable effect on the EUR/JPY pair. Monetary policy decisions, such as asset purchases and interest rate changes, can impact the value of the Yen value in relation to the Euro.

Forecast for EUR/JPY in 2025 & 2026

The EUR/JPY currency pair is expected to experience growth in 2025, with prices potentially hitting 176.18 in October. The expected fluctuation ranges from 157.31 to 176.18. Investors might expect a potential return on investment (ROI) of 9.38%, in line with a bullish outlook for the year.

By the end of 2025, the Japanese Yen is expected to increase by 6.84% against the Euro, with the EUR/JPY exchange rate reaching 172.09. The Japanese Yen to Euro forecast for 2026 is currently 172.94, representing a 7.37% rise from the current rate.

Disclaimer: This information is not considered as investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.