EUR/JPY edged lower after two days of gains. It traded near 181.40 during Asian hours on Tuesday, slipping below 181.50. Markets are now waiting for Germany’s January HICP and February ZEW Survey data, due later today. The decline came as demand for the Japanese Yen improved. Traders increasingly expect the Bank of Japan (BoJ) could raise rates sooner than previously thought. Former BoJ board member Seiji Adachi said an April rate hike looks likely once more data is available. BoJ Governor Kazuo Ueda also said his regular meeting with Prime Minister Sanae Takaichi included no specific policy requests.

Japan Growth Data And Yen Dynamics

The Yen had been under some pressure after Japan’s GDP rose just 0.1% quarter-on-quarter in Q4, following a 0.7% drop in Q3. This missed the 0.4% forecast. Annualised GDP rose 0.2% versus a 1.6% forecast, after a 2.6% fall in Q3 (revised from a 2.3% fall). The euro found support after the ECB said it will broaden access to its euro liquidity backstop for central banks worldwide. ECB President Christine Lagarde said the inflation outlook is in a “good place.” The euro also got a lift from reports that Bank of France Governor François Villeroy de Galhau will step down in June. Looking back to early 2025, EUR/JPY dipped as markets priced in a possible BoJ rate hike. At the same time, weak Japanese GDP data added uncertainty. Meanwhile, the euro was supported by a more hawkish European Central Bank. The BoJ later followed through. It ended negative interest rates in July 2025, raising rates to 0.0%, and then raised them again to 0.10% in December. Even so, the ECB kept its deposit rate at 4.00% throughout 2025 to fight persistent inflation. This kept the interest rate gap between the two currencies very wide.

Trading Implications For Policy Divergence

Today, EUR/JPY is trading around 185.20, well above the 181.50 level from a year ago. Japan’s latest national core CPI for January 2026 was 2.0%, matching the BoJ’s target. This suggests the BoJ may be careful about further aggressive hikes. That has limited Yen strength against the higher-yielding euro. For derivatives traders, the key theme remains policy divergence. The carry trade (long EUR, short JPY) is still attractive because the interest rate gap is close to 4%. Forward contracts can help lock in today’s exchange rate for future payments. This can reduce risk while still capturing positive carry. Volatility also matters in a market driven by opposing policy paths. One-month implied volatility in EUR/JPY is around 8.2%. That is elevated, but not extreme. Traders may consider selling out-of-the-money options, such as puts, to earn premium—expecting the carry trade to reduce the chance of a sharp drop in the pair. Upcoming central bank meetings are important, especially from the ECB. Any hint the ECB may cut rates earlier than expected could unwind the carry trade quickly. On the other hand, strong Japanese wage growth in the spring negotiations could point to more BoJ hikes and pressure EUR/JPY lower. Create your live VT Markets account and start trading now.

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