EUR/JPY climbs as German inflation slows, Japan's political risks persist

EUR/JPY trades around 183.70 on Friday at the time of writing, up 0.15% on the day. The cross benefits from a still-fragile Japanese Yen (JPY), as investors digest mixed macroeconomic signals from the Eurozone alongside rising political risks in Japan.

On the European side, the latest inflation data from Germany reinforces the view that the disinflation process is well underway. The final Harmonized Index of Consumer Prices (HICP) shows monthly inflation at 0.2% in December, after -0.5% in November, while annual inflation slows to 2.0% from 2.6% previously. This level matches the European Central Bank’s inflation target, supporting the scenario of a prolonged stabilization in monetary policy across the Eurozone, with no immediate need for further tightening of financial conditions.

By contrast, the Japanese Yen (JPY) remains under pressure despite increasingly firm rhetoric from policymakers. Japan’s Finance Minister, Satsuki Katayama, said she does not “rule out any options” to defend the currency, explicitly mentioning the possibility of a joint intervention with the United States (US). She recalled that the joint statement signed with Washington in September included what she described as significant language on foreign exchange intervention. These comments represent the strongest signal so far in response to the JPY’s recent weakness, but they have yet to trigger a sustained rebound.

The Japanese currency recently suffered a sharp sell-off following media reports suggesting that Prime Minister Sanae Takaichi is considering calling a snap general election as early as February. Markets fear that stronger parliamentary backing could allow her to pursue an expansionary fiscal agenda, increasing pressure on an already strained public deficit.

According to several observers, the lower house could be dissolved as early as next week, paving the way for an election scheduled for February 8. A strong seat gain for the Liberal Democratic Party (LDP) is generally seen as Yen-negative, as it would raise the likelihood of looser fiscal and monetary policies. Conversely, a disappointing outcome for the ruling party, in a context of potentially stronger opposition, could revive downside pressure on EUR/JPY.

For now, the balance remains fragile. Intervention threats are limiting excessive Japanese Yen weakness, but political and fiscal uncertainties continue to dominate, allowing EUR/JPY to hold firm.