EUR/JPY and Euroyen 2025: Geopolitical Volatility vs. Interest Rate Differential

The euroyen exchange rate has experienced extreme fluctuations during the first months of 2025, alternating between moments of unexpected strength and sharp declines. The EUR/JPY pair started the year near 161.7 ¥ per euro, hit a low of 155.6 ¥ at the end of February, and reached 164.2 ¥ in May, then stabilized around 163.4 ¥. This variability reflects a transitioning market, where global risk aversion directly competes with expectations of differential performance between economies.

The Pillars of Euroyen Volatility in 2025

Monetary policy changes as main catalysts

The Bank of Japan’s monetary shift marked the start of the movement. In January, the institution raised its benchmark rate from 0.25% to 0.50%, its highest level since 2008. Although the yen experienced immediate appreciation, the effect quickly dissipated because European yields continued to dominate broadly. Simultaneously, the ECB implemented three consecutive reductions (January, March, and April), lowering its deposit facility from 4% to 2.25%. Each cut acted as a brake on euro recovery attempts.

Geopolitical and trade factors

Washington announced general tariffs of 10% on imports and an additional 20% on EU products in February. Fear of a trade war triggered a massive search for safe-haven assets, pushing the EUR/JPY pair to its lowest level. When these tariffs took effect in April, the initial impact was less dramatic because markets had already incorporated the information.

The nature of the yen as a safe-haven currency

The yen has structural features that favor it during crises: Japan is a major global creditor without dependence on external capital, which inspires confidence. Additionally, there is a historical carry trade where investors borrow in low-yielding yen (currency of low return) to invest in higher-yield assets; during disturbances, these loans are massively repaid, buying yen and appreciating it. The yen market is simultaneously huge and highly liquid, facilitating quick purchases in moments of panic.

Chinese monetary stimulus in May

Beijing lowered its 7-day repo rate to 1.40% and eased bank reserve requirements, injecting liquidity into its economy. This stimulus improved risk appetite in Asian stocks, leading many investors to abandon defensive yen positions. The EUR/JPY pair recovered quickly, reaching new highs.

Forward Outlook for Euroyen: End of 2025

The yield differential is now the determining variable. Markets price in the Bank of Japan increasing its rate to 0.75% in summer and 1% in fall. Although not a drastic shift, it is enough to discourage the perpetual carry trade that has pressured the yen for years. Each increase reduces the profitability of financing in yen, decreasing the supply of currencies and providing structural support.

In the eurozone, the opposite occurs. With declining inflation and growth slowed by tariffs, the ECB is likely to cut its rate to 2% before year-end. This adjustment would narrow the yield differential with Japan to just 1% or less, an insufficient level to compensate for the risk of capital reallocation when global instability resurges.

The baseline scenario projects EUR/JPY near 162 ¥ for the end of 2025, with a gradual downward bias. When markets are calm, the euro should stay above 165 ¥; in case of inflation surprises, new trade tariffs, or stock market corrections, the yen will resume its safe-haven role and could push the pair toward 158-160 ¥.

Technical Analysis: Signs of Deceleration in the Upward Momentum

The daily chart shows a moderate bullish bias but with signs of fatigue. The price trades above the main moving average (approximately 161 ¥), confirming the upward trend since March. However, recent candles show narrow bodies clustered near the upper edge of Bollinger Bands (max 164.0; average 162.5), indicating weakness in buying momentum. The channel has contracted compared to March, a classic precursor to a sharp expansion.

The 14-period RSI registers at 56 after touching 67 last week, leaving overbought territory and generating a bearish divergence with the high of May 1 (164.2 ¥). This reinforces the likelihood of a correction or temporary pause.

Immediate support is at the Bollinger mean (162.5 ¥); losing this level would open the door to 159.8-160 ¥. Key resistance remains at 164.2 ¥; a clear close above would encourage movement toward 166-168 ¥.

Institutional Projections (May 2025)

These divergences reflect different methodologies: some portals offer specific monthly ranges, others present broad annual bands, and some publish single-point forecasts.

Investment Strategies in Euroyen: Short to Long Term

3-6 months horizon

The pair has moved within a 160-170 channel since the start of the year. When the quote approaches the upper zone (165-170 ¥), it makes sense to sell euros and buy yen with an initial target at 162 ¥ and a disciplined stop-loss above 171 ¥. Pre-meeting sessions of the Bank of Japan generate oscillations of one or two yen; active traders can take advantage with reduced futures or put-spread options.

Medium-term horizon (end of 2025)

Projections converge at 160-170 ¥ by year-end. A prudent tactic is to accumulate yen in tranches: buy when the pair exceeds 163-164 ¥, averaging the price and reducing the risk of a single entry. Those needing to hedge euro cash flows can set forwards or yen deposits near current levels; the cost decreases as the interest rate differential narrows.

Profit-taking

If the pair approaches 160-162 ¥ after the Bank of Japan’s rate hikes planned for summer and fall, it is advisable to realize at least partial gains, maintaining residual exposure as protection against geopolitical shocks that historically favor the yen.

Historical Context: EUR/JPY Since 1999

Since its inception, the EUR/JPY pair has witnessed the yen’s strength during crises and euro fluctuations amid European challenges. During the 2008 financial crisis, the yen strengthened as a safe haven while the euro depreciated due to Eurozone instability. The subsequent European economic recovery gradually favored the euro, especially under recent expansionary policies of the Bank of Japan. Today, with the Bank of Japan tightening and the ECB easing, the pair trades in 160-165 ¥, again reflecting the tug-of-war between a defensive yen and a pressured euro.

Operational Risks and Contingency Factors

An unexpected pause by the Bank of Japan if Japanese inflation subsides, an unforeseen rise in European core inflation that halts ECB cuts, or a prolonged stock rally reactivating carry trades could return the pair to the upper range. New rounds of tariffs between the US and the EU would boost the yen and push toward 158-160 ¥; any easing would allow rebounds toward 167-168 ¥. Maintaining clear stops and reviewing exposure after each central bank meeting remains essential.

Final Outlook: Why Buy Yen in 2025

The interest rate differential between Japan and the eurozone continues to narrow, reducing incentives to hold euros versus yen. The Bank of Japan aims for rates of 1% before October, while the ECB suggests a reduction to 2% when activity slows. This combination favors a structurally stronger yen in upcoming quarters, marking the first window in years to build, with judgment and patience, a yen position with a reasonable expectation of moderate revaluation and well-defined risk limits. The euroyen, after nearly two decades where carry trade dominated unchallenged, finally shows a downward bias, albeit gradual, for the EUR/JPY pair.