EUR/JPY advances on Yen weakness driven by fiscal risks, low rate outlook

• EUR/JPY advances on Monday, supported by JPY weakness driven by fiscal risks and expectations of prolonged low interest rates in Japan.
• Recent comments from the Japanese government and the large fiscal stimulus package add pressure on the currency.
• Verbal intervention from Japanese authorities helps limit Japanese Yen losses, as markets remain alert to the risk of actual intervention.

EUR/JPY trades around 180.70, up 0.35% on Monday at the time of writing. The cross benefits from renewed selling pressure on the Japanese Yen (JPY), weakened by persistent concerns over Japan’s fiscal trajectory and doubts over an imminent rate hike by the Bank of Japan (BoJ). Investors remain cautious, however, as Japanese authorities intensify verbal warnings against what they view as excessive currency moves.

The current market dynamics stem from the announcement of a large stimulus package recently approved by the Japanese government. As reported by Reuters, Prime Minister Sanae Takaichi endorsed a ¥21.3 trillion economic package, including ¥17.7 trillion in general account spending and ¥2.7 trillion in tax cuts.

This plan, Japan’s largest since the Covid-19 pandemic, revives concerns over the country’s deteriorating fiscal position and fuels expectations of increased government debt issuance, weighing on the JPY.

At the same time, the Japanese administration continues to favor accommodative financial conditions, a stance that keeps the Japanese Yen under pressure and supports the upward move in EUR/JPY.

Recent comments from BoJ Governor Kazuo Ueda, noting that excessive Japanese Yen weakness could push up import-driven inflation, have not been enough to shift sentiment, as markets increasingly doubt the likelihood of a rate hike as early as December.

On the European side, the Euro (EUR) benefits from a mild improvement in risk appetite, despite mixed macroeconomic data. The German IFO Business Climate fell to 88.1 in November, below expectations, but the currency remains supported by the cautious yet vigilant tone of the European Central Bank (ECB).

President Christine Lagarde reiterated that the ECB remains ready to adjust its policy if inflation risks rise again, while Governing Council member Gabriel Makhlouf stressed that no major changes are likely unless the economic outlook shifts materially.

Another factor limiting JPY downside comes from stronger Japanese official rhetoric. Finance Minister Satsuki Katayama warned that Japan stands ready to act if markets become excessively volatile, a message interpreted as a firm signal aimed at discouraging aggressive selling of the JPY. This helps contain the upside in EUR/JPY, even if it does not reverse the broader upward trend.