EUR/JPY climbs on Eurozone monetary stability, Japan election uncertainty weighs

EUR/JPY trades around 183.80 on Tuesday at the time of writing, up 0.20% on the day, amid contrasting dynamics between Europe and Japan.

On the European side, markets expect the European Central Bank (ECB) to keep its Deposit Facility Rate at 2%, as inflation in the Eurozone remains broadly close to the institution’s 2% target. This expectation is reinforced by the anticipated slowdown in headline inflation, largely driven by energy-related base effects, which the ECB has already described as temporary.

Ahead of the monetary policy decision, attention turns to Wednesday’s release of the preliminary Eurozone Harmonized Index of Consumer Prices (HICP) for January. Headline inflation is expected at 1.7% YoY, down from 1.9% in December, while core inflation, which excludes the most volatile components, is forecasted to remain steady at 2.3%. These figures would support the central bank’s wait-and-see approach, with no clear signal of an imminent shift in monetary policy.

In Japan, investor focus is largely on the snap general election scheduled for February 8, following the dissolution of the lower house by Prime Minister Sanae Takaichi. A decisive victory for the Liberal Democratic Party would be seen as strengthening the prime minister’s mandate to pursue a more expansionary fiscal agenda, reviving concerns over the sustainability of Japan’s public debt. The pledge to suspend the consumption tax on food products for two years is also adding to budgetary concerns.

Meanwhile, the excessive weakness of the Japanese Yen (JPY) remains a sensitive issue for authorities. Japan’s Finance Minister Satsuki Katayama said on Tuesday that she would not comment on whether any foreign exchange intervention had taken place, following reports of a so-called “rate check” that briefly triggered a corrective move in the currency. She reiterated that Japan would continue to closely coordinate with United States (US) authorities, in line with the joint Japan-US statement issued last September, and would respond appropriately if needed, keeping intervention risks firmly on investors’ radar.

Finally, the Summary of Opinions from the Bank of Japan (BoJ) January meeting showed that policymakers debated mounting price pressures stemming from a weak JPY, highlighting a more hawkish tone among some board members. This complex political and monetary backdrop in Japan continues to weigh on the currency, while relatively stable prospects in the Eurozone provide support to the EUR/JPY pair.