**The Economic Landscape** The Bank of Japan (BoJ) is responsible for the country’s monetary policy and aims for a 2% inflation rate. Since 2013, the BoJ has used a very loose policy, including measures like Quantitative and Qualitative Easing. However, in March 2024, the BoJ increased interest rates to tackle rising inflation caused by global energy prices and wage growth. Due to the BoJ’s previous strategies, the yen lost value, especially as Japan’s interest rate policies diverged from those of other central banks. This created a wider gap with other currencies, further decreasing the value of the yen, which started to recover in 2024. Throughout 2025, we witnessed Japanese officials issuing repeated warnings, often signaling future actions. With the EUR/JPY exchange rate nearing the 188.00 mark, we see a familiar trend emerging in early 2026. This level seems crucial for policymakers, increasing the chances of direct intervention. **Market Dynamics and Speculation** In December 2025, Japan’s core Consumer Price Index (CPI) hit 2.5%, staying above the BoJ’s 2% goal for over a year. Although the BoJ has slowly been adjusting its policies since March 2024, there remains a significant interest rate gap between Japan and the Eurozone. This gap mainly drives the yen’s weakness, putting pressure on the market for direct intervention. Due to the risk of a sudden spike in the yen’s value, there is a noticeable rise in the price of options for downside protection. For example, one-month implied volatility on JPY pairs has increased to 11.5%, showing that traders are anxious about possible intervention. For derivative traders, this might mean that buying puts on EUR/JPY or creating put spreads to manage costs could be a smart way to protect against a quick rise in the yen’s value. On the other hand, the Euro’s fundamentals don’t offer much support for a continued rise. The latest German ZEW Economic Sentiment survey came in below expectations, continuing a pattern of weak economic data from Germany, the Eurozone’s largest economy. This fundamental weakness in the Euro might cause the EUR/JPY pair to move downwards, especially if Japanese officials decide to take action. It’s also important to remember the Ministry of Finance’s intervention in late 2025, when they spent a record ¥9.2 trillion to support the yen. This intervention effectively boosted the currency for several weeks, hurting speculators betting against it. The success of that past action adds credibility to current warnings from officials. **Create your live VT Markets account and start trading now.**

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