EUR/JPY 2025: Should you strengthen your portfolio with yen amid the current volatility?

The relationship between the euro and the yen has experienced dramatic movements during 2025, reaching fluctuations of over eight yen in just four months. This extreme behavior reflects how two of the main global currencies respond divergently to an environment marked by profound monetary changes and unprecedented trade tensions. The market has shifted from trading around 161.7 ¥ per € at the beginning of the year to a low of 155.6 ¥ on February 27, before rebounding to 164.2 ¥ on May 1, when it was near 163.4 ¥.

Five Catalysts That Have Redefined the EUR/JPY Dynamics

Monetary tightening in Japan

The Bank of Japan surprised markets by raising its benchmark rate from 0.25% to 0.50% in January, reaching the highest level since 2008. Although the yen initially strengthened, the momentum quickly dissipated because European yields maintained a substantial advantage. This increase marked the start of a regime shift after years of extreme monetary stimulus.

Threat of global trade war

Washington announced a universal 10% tariff on all imports and an additional 20% surcharge for goods from the European Union in February. The panic over an escalation in trade tensions drove demand for safe-haven assets decisively, pushing the EUR/JPY pair to its lowest of the year: 155.6 ¥ on February 27.

The defensive nature of the yen in crisis

Historically, yen functions as a safe-haven currency because Japan is a major global creditor regardless of external capital flows. Additionally, carry trades—where investors finance in yen to buy higher-yielding assets—reverse quickly during times of uncertainty, generating massive yen purchases. Its huge spot market and high liquidity make it the most accessible Asian currency for emergency defensive operations.

Sequential ECB rate cuts

The European Central Bank reduced its deposit facility from 4% to 2.25% in three stages (January 30, March 12, and April 17). With the eurozone cooling and inflation easing, each cut halted the euro’s upward attempts against the yen.

Chinese liquidity injection in May

Beijing implemented monetary stimulus by lowering its 7-day repo rate to 1.40% and easing bank reserve requirements. This measure revived risk appetite in Asian stocks, reducing defensive yen purchases and allowing the EUR/JPY pair to rebound to 164.2 ¥ on May 1.

EUR/JPY Projection: Base Scenario for the Rest of 2025

The convergence of monetary policies will remain the dominant factor. Market expectations price in the Bank of Japan raising its rate to 0.75% in summer and to 1% in autumn, softening but not eliminating the carry trade that has depressed the yen for years. Each Japanese rate hike reduces the profitability of borrowing in yen to buy foreign assets, structurally strengthening the Japanese currency.

Meanwhile, the ECB is likely to cut its rate to 2% before year-end, compressing the yield differential with Japan to just over one percentage point. This narrow margin will no longer compensate for the risk of capital flows toward the euro amid geopolitical disturbances.

The base scenario envisions a broad but gradually declining range: when conditions are calm and risk appetite resurges, the euro should stay above 165 ¥; when shocks occur (US inflation surprises, new trade tariffs, stock corrections), yen will regain its defensive role and push the pair toward 158-160 ¥. The EUR/JPY forecast for year-end 2025 is around 162 ¥, with a moderately favorable bias for a stronger yen if the BoJ confirms its extended rate hike cycle into 2026.

Technical Readings: Signs of Bullish Exhaustion

The daily chart of EUR/JPY maintains a moderate upward trend, but indicators suggest short-term saturation. The price trades above its main moving average (around 161 ¥), confirming momentum since early March. However, recent candles have contracted in size and cluster near the upper band of the Bollinger channel (max 164.0; average 162.5), indicating waning buying pressure.

The 14-session RSI has fallen from 67 a week ago to 56 currently, leaving overbought territory and forming a bearish divergence with the May 1 high (164.2). This setup anticipates a pause or temporary pullback. Immediate support lies at the Bollinger middle band (162.5) and then at the confluence of the lower band and moving average, around 161 ¥; a break below would open the door to 159.8-160 ¥. Key resistance remains at 164.2 ¥; a convincing close above would stimulate a move toward 166-168 ¥.

Consensus of Forecasts from Specialized Institutions (May 2025)

These projections vary because they use different methodologies: LongForecast specifies concrete monthly ranges for December, CoinCodex detects broader annual bands via algorithms, and Traders Union publishes point forecasts for year-end.

When Is It Prudent to Position in Yen? Investment Tactics

The narrowing of the interest rate differential between Japan and the eurozone gradually reduces the incentive to hold exposure in euros versus yen. With the Bank of Japan targeting 1% before October and the ECB hinting at reductions toward 2%, this combination supports a structurally stronger yen in the coming quarters, creating an opportunity window to accumulate yen.

Short-term trading (3-6 months)

The pair has oscillated within a 160-170 channel since the beginning 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 above 171 ¥. Days before BoJ meetings, quick swings of one or two yen occur; active traders can exploit volatility with small futures or put-spread options that reduce initial premiums.

Medium-term positioning (year-end 2025)

Investment bank projections converge at 160-170 for year-end, while more optimistic algorithmic models target 170-173. A prudent approach is to accumulate yen in tranches, buying whenever the pair exceeds 163-164, averaging the entry price and reducing risk of a single entry. Investors needing euro cash flow hedging can set forwards or yen deposits near current levels; costs decrease as the rate differential narrows.

Profit-taking

If the pair declines toward 160-162 after BoJ hikes expected in summer and autumn, it’s advisable to take at least some profits, keeping the rest as protection against geopolitical shocks that historically favor the yen.

Main Risks to Monitor

An unexpected pause by the Bank of Japan if Japanese inflation unexpectedly declines, an unforeseen rise in European core inflation that halts ECB cuts, or a sustained stock rally reigniting carry trades could push the pair back to the upper part of the range. Maintaining clear stops and reviewing exposure after each central bank meeting remains essential.

Trade risks also persist: if a new round of tariffs erupts between the US and the EU, the yen as a safe-haven currency could strengthen significantly, pushing the pair toward 158-160 ¥. Conversely, any gesture of easing trade tensions could lead to rebounds toward 167-168 ¥.

Historical Context: Two Decades of EUR/JPY Rivalry

Since 1999, the EUR/JPY pair has documented the yen’s resilience as a safe haven during crises and the euro’s fluctuations amid European challenges. Divergences between the ECB and Bank of Japan’s monetary policies have exerted constant influence. The yen gained ground during the 2008 financial crisis due to its defensive status, while the euro depreciated amid economic instability and debt crises in the eurozone in the early 2010s.

Subsequent European recovery and BoJ’s expansive policies favored a gradual euro appreciation. Today, with the BoJ raising rates and the ECB cutting them, the pair trades in 160-165 ¥, again reflecting the tug-of-war between a yen regaining defensiveness and a euro pressured by European slowdown.

Final Reflection: Opportunity in the Cycle Shift

Forecasts for EUR/JPY converge in a 158-160 ¥ range for year-end 2025, reflecting a market that is finally embracing the cycle change: the Bank of Japan ends with near-zero money while the ECB reduces rates. The yield differential, which was around two points a year ago, will compress to just over one, removing the classic incentive to finance in yen to buy euros. Coupled with the yen’s defensive stance amid rising trade tensions.

With the pair still bouncing between 160 and 170 ¥, it’s a good time to buy yen on rebounds toward 165-170 ¥, targeting 160-162 ¥ as an objective and maintaining risk controls at 171 ¥. The main risk is that the BoJ halts hikes or that European inflation pressures rise again, but the structural bias has shifted in favor of the yen. For the first time in nearly two decades, carry trade is no longer a one-way path, suggesting a downward trend for EUR/JPY although gradual, for the remainder of 2025.