The euro broke a five-day run of gains against the yen on Friday after Japanese officials warned about speculative moves in JPY markets. EUR/JPY traded around 185.00, down from session highs near 185.65, yet it remained on course for a fourth straight weekly rise. Japan’s Cabinet Secretary, Minor Kihara, said he was “extremely concerned” about speculative yen moves and reiterated that the government would take appropriate action in forex markets, without referring to any specific exchange level.
The yen’s weakness has been driven by high oil prices and comparatively low Japanese Government Bond (JGB) yields, widening the yield gap and supporting carry trading flows. In Japan, May Tokyo CPI eased, while industrial production strengthened and the unemployment rate fell, keeping expectations of a Bank of Japan (BoJ) rate hike alive. In the eurozone, France’s GDP contracted in Q1 in line with expectations, and May inflation rose above the European Central Bank’s (ECB) 2% target, with Italian GDP and CPI due ahead of German CPI later in the session.
Risks of Japanese Intervention and Short-Term Reversal
We see the Japanese government’s recent comments as a clear warning sign for anyone holding long EUR/JPY positions. The verbal concern about “speculative moves” is often the first step before direct market intervention, creating significant short-term risk. This suggests that the pair’s steady climb could face a sudden and sharp reversal.
We must take the threat of intervention seriously, as Japan has a history of decisive action. Looking back, authorities spent a record of nearly 10 trillion yen in the spring of 2024 to prop up the currency, proving their warnings are credible. We should therefore consider using put options to protect our positions from a similar sudden drop in the coming weeks.
Yield Gap, Carry Trades, and Long-Term Outlook
The fundamental reason for the Yen’s weakness, however, has not changed, which is the massive gap in interest rates. With the 10-year Japanese government bond yield just above 1% while the equivalent German bond offers over 2.5%, borrowing Yen to buy Euros remains a profitable strategy. This underlying “carry trade” will likely continue to support the EUR/JPY pair over the long term.
Further pressure on the Yen comes from oil prices, with Brent crude holding above $80 a barrel, which raises costs for an energy-importer like Japan. In contrast, Eurozone inflation is hovering around 2.4%, giving the European Central Bank a reason to be slow in cutting its own interest rates. This dynamic creates a difficult environment where the long-term trend is up, but the short-term risk of a sell-off is very high.
