The euro-yen exchange rate in 2025: a transition towards yen strength

Market Outlook: The Monetary Shift Reshaping EUR/JPY

The euro-yen exchange rate has undergone profound changes during the first months of 2025, marked by contrasting decisions from two major central banks. While the Bank of Japan has begun normalizing its monetary policy, the ECB is moving toward further rate cuts. This mismatch in monetary cycles is the main driver behind the fluctuations observed in the EUR/JPY pair, which has traded between 155.6¥ and 164.2¥ in just four months.

The current quote hovers around 163.4¥ (in early May), reflecting a market that is finally internalizing a regime change that will last for the rest of the year. The euro-yen change reflects this policy tug-of-war: on one side, Tokyo’s exit from ultra-cheap money; on the other, Frankfurt’s additional easing in response to weak European growth.

Five Catalysts That Shook EUR/JPY in 2025

First shake-up: BoJ tightens monetary policy. In January, the Japanese authorities raised their key rate from 0.25% to 0.50%, reaching its highest since 2008. The yen responded immediately, although the initial effect dissipated because European yields maintained a substantial advantage over Japanese yields. This initial move by the Bank of Japan opened the door to future hikes expected for summer and autumn, toward 0.75% and 1.0% respectively.

Second driver: Washington hikes tariffs in February. The US administration announced a 10% tariff on all imports, with an additional 20% specifically targeting European products. This trade escalation revived appetite for safe-haven assets, sharply pressuring the euro-yen to its low of 155.6¥ on February 27. Uncertainty over trade wars always favors the yen.

Third reason: yen’s properties as a safe-haven asset. Japan maintains a consolidated global creditor position and does not depend on external financing, inspiring confidence during turbulence. Additionally, there is a structural phenomenon: many investors use yen to finance carry trade operations; when markets deteriorate, they liquidate these positions and buy yen to close their loans, pushing the Japanese currency higher. Moreover, the yen market is colossal and highly liquid, making it the most agile Asian currency for quick access during panic.

Fourth catalyst: three consecutive ECB rate cuts. Between January 30 and April 17, the European authority implemented three rate reduction pauses, lowering the deposit facility from 4.0% to 2.25%. With European activity stagnant and inflation easing, each adjustment limited euro rebounds and reinforced the relative weakness of the euro against the euro-yen.

Fifth factor: Chinese stimulus measures in May. Beijing injected liquidity through reductions in 7-day repo rates (to 1.40%) and reserve requirement ratio cuts, expanding banking credit capacity. This boost revived Asian stock markets and rekindled risk appetite, halting yen purchases (as a safe-haven currency) and allowing the euro-yen to rebound quickly to 164.2¥ on May 1.

Technical Analysis of EUR/JPY: Short-term Exhaustion Signals

The daily chart structure shows a moderate bullish bias, although technical signals suggest a loss of momentum. The price remains above its main moving average (around 161¥), confirming the uptrend since early March. However, recent candles show narrow bodies clustered near the upper Bollinger band (upper limit 164.0¥; average 162.5¥), a classic sign of a lack of additional buying pressure.

The 14-session RSI has retreated from 67 a week ago to 56 currently, leaving overbought territory and showing a slight bearish divergence relative to the May 1 high. This hints at a correction or short-term pause. Immediate supports are at the Bollinger middle (162.5¥) and further down at the confluence of 161.0¥. Key resistances remain at 164.2¥, a break above which could open the door to 166-168¥ ranges.

EUR/JPY Change Scenarios for 2025 Close

Institutional forecasts: Major analysis portals offer varied but converging ranges: LongForecast predicts 165-173¥, CoinCodex places it at 166.08-171.94¥, Traders Union projects 165.64¥ year-end, and Bankinter maintains a 160-170¥ range. Our central scenario places 2025 close near 162¥, with a bullish bias if the BoJ confirms its upward cycle toward 2026.

Expected trading range: During calm periods and risk appetite reactivation, EUR/JPY should face resistance above 165¥; when geopolitical shocks, surprising inflation data, or stock corrections occur, the yen would regain its safe-haven role and could push the euro-yen toward the 158-160¥ band. A broad but gradually declining range will characterize the euro-yen in the remaining months.

Monetary Fundamentals: Why the Yen Gains Ground

The progression of rates from both central banks determines the yield differential, a crucial variable for EUR/JPY. A year ago, this differential was around two percentage points; now it has narrowed to just over one and will continue to compress. The Bank of Japan targets 1.0% before October, while the ECB hints at cuts down to 2.0% if European activity continues to weaken.

This convergence of rates reduces the classic incentive to finance in yen (cheap currency) to buy euros or European assets (more profitable). When the differential is generous, carry trade prospers; as it narrows, the strategy loses appeal. For the first time in nearly two decades, this pressure mechanism on the yen is reversing, providing structural support to the Japanese currency and downward pressure on EUR/JPY.

Investment Strategies: How to Position for EUR/JPY

Three to six months horizon:
The pair has traded within a 160-170¥ range since the start of the year. Active tactics include selling euros and buying yen near 165-170¥ with targets at 162¥ and disciplined stops above 171¥. Days before Bank of Japan announcements generate quick oscillations, exploitable via small futures or put-spread options that reduce initial premiums.

Until year-end:
Forecasts converge at 160-170¥, with some models slightly more optimistic reaching 170-173¥. A prudent approach is to accumulate yen in tranches, buying on each break of 163-164¥ to average prices and reduce entry risk. Those needing euro flow hedges can set forwards or yen deposits near current levels; the cost of these hedges declines as the rate differential narrows.

Profit-taking:
If EUR/JPY approaches 160-162¥ after the expected BoJ hikes in summer and autumn, it’s advisable to realize at least partial gains, maintaining residual exposure as protection against geopolitical shocks that historically favor the yen.

Main Risks to EUR/JPY

• An unexpected pause by the Bank of Japan if Japanese inflation moderates could reverse the bias.
• A European inflation rally that halts ECB rate cuts would compress the yield differential.
• A prolonged stock rally would reactivate carry trade and push EUR/JPY toward 167-168¥.
• New rounds of tariffs between the US and EU could boost the yen back toward 158-160¥.

Maintaining clear stops and reviewing exposure after each monetary authority meeting remains essential to successfully navigate the EUR/JPY change.

Historical Context: EUR/JPY since 1999

Since its inception in 1999, the EUR/JPY pair has documented the yen as a safe haven during crises and the euro’s vicissitudes amid European challenges. Divergences between the ECB and BoJ have permanently shaped this cross. During the 2008 collapse, the yen strengthened while the euro depreciated due to Eurozone instability. The subsequent European recovery and BoJ’s expansionary policies favored a gradual euro appreciation. Today, that cycle is reversing: with the BoJ raising rates and the ECB cutting them, the pair again reflects the tug-of-war between a yen regaining its defensive role and a euro pressured by economic slowdown.

Conclusions on EUR/JPY in 2025

Forecasts converge on a 158-170¥ range for year-end 2025, reflecting a market that is finally internalizing the cycle shift. The Bank of Japan ends decades of ultra-cheap money; the ECB cuts rates amid weak activity. The yield differential, which a year ago exceeded two points, will fall to just over one, removing the classic carry trade incentive. Coupled with the yen’s safe-haven status during trade tensions, EUR/JPY faces structural downward pressure, albeit gradual.

With the pair still bouncing between 160-170¥, the optimal accumulation moment for yen is during rebounds toward 165-170¥, targeting 160-162¥ as profit objectives. Maintaining risk discipline at 171¥ is critical. The main risk remains a surprise pause by the BoJ or a return of European inflation; however, the structural bias clearly favors the yen. For the first time in nearly two decades, the carry trade is no longer a one-way street, suggesting that EUR/JPY will exhibit a downward trend, albeit moderate, during the remaining months of 2025.