EUR/JPY 2025: Navigating volatility between Japanese tightening and European easing

After a year start marked by extreme turbulence, the euro-yen cross is shaping up as one of the most dynamic pairs of 2025. Geopolitical uncertainty, changes in monetary policies, and tariff tensions have created a volatile environment that offers both risks and opportunities for investors interested in positioning in currencies. Let’s analyze what to expect from the EUR/JPY pair through the end of the year.

Volatility from 161 to 164: five forces transforming the market

Since the beginning of the year, the EUR/JPY pair has fluctuated within a range of more than eight yen. The cross started 2025 at 161.7 ¥ per €, touched lows at 155.6 ¥ (February 27), and reached a high of 164.2 ¥ (May 1), reflecting a dynamic where capital flows respond simultaneously to multiple stimuli.

The first impulse: Bank of Japan accelerates normalization cycle

In January, the BoJ raised its benchmark rate from 0.25% to 0.50%, marking the highest level since 2008. This move temporarily strengthened the yen, although the effect dissipated quickly because European yields continued to maintain a significant premium over Japanese assets.

Second factor: US tariffs reshaped risk appetite

The announcement of US tariffs in February (10% general, 20% for EU imports) triggered demand for safe-haven assets. The yen, historically a safe haven in times of stress, captured these defensive flows and pressured the EUR/JPY pair toward 155.6 ¥.

Third reason: The structural nature of the yen as a defensive currency

Japan, as a major global net creditor, inspires confidence during uncertain times. Additionally, there is a crucial technical factor: many traders finance speculative positions by borrowing in yen at low cost (carry trade). When markets deteriorate, these investors close positions by liquidating assets and repurchasing yen, amplifying the yen’s bullish movements. The depth and liquidity of the yen market make it the most accessible Asian currency for quickly repatriating capital in moments of alarm.

Fourth impulse: European Central Bank cuts while Tokyo tightens

Between January and April, the ECB reduced its deposit facility three times (January 30, March 12, April 17), from 4% to 2.25%. With inflation moderating and European growth slowing, each cut depressed euro rebounds and reinforced the negative interest rate differential.

Fifth catalyst: Chinese monetary stimulus reactivated risk appetite

In May, Beijing injected liquidity into the economy through cuts in its 7-day repo rates (at 1.40%) and reduction of bank reserve requirements. This stimulus revitalized Asian stock markets, encouraging investors to abandon defensive yen positions and seek yields in higher-risk assets. The EUR/JPY pair quickly rose toward 164.2 ¥.

The struggle between defensive flows and yield differentials

The behavior of the EUR/JPY pair in 2025 confirms one reality: although the interest rate differential is important, geopolitical shocks prevail. When risk aversion increases, the yen appreciates regardless of its yield. When market sentiment improves, the euro’s yield premium again plays a central role.

EUR/JPY forecast until the end of the year: announced contraction margins

In the coming months, the pair’s dynamics will be determined by the divergent trajectories of both central banks. Markets have priced in the BoJ raising its rate to 0.75% in summer and to 1.00% in fall. Although not a radical shift, each increase erodes the profitability of the carry trade strategy (financing cheaply in yen to invest in higher-yield assets), reducing yen supply in the market and providing structural support to the Japanese currency.

In the eurozone, the trajectory is the opposite. With inflation easing and growth trapped by tariff effects, the ECB will likely raise rates to 2% before year-end. This adjustment will compress the yield differential to just one percentage point, an insufficient level to compensate for the risk of moving capital into the euro in an unstable global context.

The baseline scenario places the EUR/JPY pair around 162 ¥ by the end of 2025, with a slight bias favoring a stronger yen if the BoJ confirms its cycle of increases in 2026. Operational margins narrow: when markets breathe easy, the pair should find resistance above 165 ¥; in case of any shocks (US inflation, new tariffs, stock market corrections), the yen would regain its defensive role and could push the cross to the 158-160 ¥ zone.

Technical analysis: exhaustion signals in the short term

The daily chart of the EUR/JPY pair maintains an upward trend since early March, with quotes above the main moving average (around 161). However, recent candles show narrow bodies clustered near the upper edge of the Bollinger band (max: 164.0; average: 162.5), indicating weakening in the buying momentum.

The Bollinger channel has contracted compared to March, a classic pattern that precedes sharp movements when the range expands again. The 14-session RSI retreated from 67 last week to 56 currently, moving away from overbought territory and drawing a bearish divergence with the May 1 high (164.2 ¥). This setup suggests a pause or short-term correction.

Immediate support is at the Bollinger middle (162.5 ¥) and further below at the confluence of the lower band with the moving average, near 161 ¥; losing this level would open doors toward 159.8-160 ¥. On the upside, 164.2 ¥ remains a key resistance; a confirmed close above would push the pair toward 166-168 ¥.

Consensus outlook for 2025

Projections vary by methodology: some portals offer specific monthly ranges (December 2025), others present the broader annual band detected by algorithms, and some disclose a single year-end projection. Nonetheless, there is a general consensus that the pair will trade between 160 and 170 ¥.

Historical context: two decades of transformation

Since 1999, the EUR/JPY pair has reflected the relative strength of the yen during turbulence and the euro’s fluctuations amid European challenges. The 2008 financial crisis strengthened the yen as a refuge, while the eurozone debt crisis in the early 2010s pressured the euro. The subsequent European economic recovery and BoJ’s expansive policies favored a gradual appreciation of the euro.

Today, with the BoJ normalizing rates and the ECB cutting them, the pair again reflects this historic struggle: a yen regaining its defensive role against a euro pressured by European slowdown. The 160-165 ¥ zone represents a temporary equilibrium point between these two forces.

Investment strategies: how to operate the EUR/JPY forecast

Short-term tactic (3 to 6 months)

The pair oscillates within a 160-170 channel. Whenever it approaches 165-170 ¥, it makes sense to reduce euro exposure in favor of yen, with an initial target at 162 ¥ and disciplined stop at 171 ¥. The days before BoJ meetings generate quick oscillations of one or two yen; active traders can capitalize on these fluctuations with small-sized futures.

Medium-term approach (year-end 2025)

Projections converge at 160-170 ¥. A prudent tactic is to gradually accumulate yen: buy each time the cross exceeds 163-164 ¥, averaging the entry price and reducing risk. Those needing euro flow hedging can structure forwards or yen deposits near current levels; costs decrease as the rate differential compresses.

Profit-taking

If the cross falls to 160-162 ¥ after the expected rate hikes by the BoJ (summer and fall), it’s advisable to take at least partial profits, keeping the rest as protection against geopolitical shocks that historically favor the yen.

Main risks and management

• An unexpected pause by the BoJ if Japanese inflation subsides, or a rebound in European core inflation that halts ECB cuts, could send the cross back toward 170 ¥.
• New rounds of tariffs between the US and the EU would push the yen toward 158-160 ¥; any gesture of détente would have the opposite effect, allowing rebounds to 167-168 ¥.
• Maintaining clear stops and reviewing exposure after each central bank meeting is essential.

Conclusion: The first window in years for the yen

For the first time in nearly two decades, carry trade is no longer a one-way street. The BoJ normalizing rates and the ECB cutting them have rebalanced incentives, suggesting a gradually downward trend for the EUR/JPY pair for the rest of 2025.

With the pair still bouncing between 160 and 170 ¥, it’s a good time to build defensive yen positions, taking advantage of rebounds toward 165-170 ¥, aiming for 160-162 ¥ as a target with risk control at 171 ¥. The structural bias has definitively shifted in favor of the yen, offering prospects for moderate revaluation but with well-defined risk limits.