EUR/JPY Holds Range as FX Flows and Rate Outlook Weigh

Key Moments

Spot Action and Policy Backdrop

EUR/JPY was little changed near 177.30 during early European trading on Friday, with participants remaining alert to the risk of direct action by Japanese authorities to support the Japanese Yen (JPY).

Comments from the Bank of Japan (BoJ) added a hawkish nuance to the policy outlook, offering some underlying support to the Yen and limiting gains in the cross. BoJ policy board member Junko Koeda stated that there is no need to be excessively cautious about rate hikes, citing persistent upside risks to inflation.

Koeda also remarked that the central bank should adjust its policy rate in a timely way, while taking into account the estimated range of the neutral interest rate.

Euro-Area Considerations and ECB Expectations

On the Euro side, analysts at Citi see French fiscal concerns as a potential catalyst for the European Central Bank (ECB) to halt rate hikes after December, or earlier if financial strains spread across the broader Eurozone. According to a Reuters poll cited in the article, the ECB is expected to keep its deposit rate steady at 2.50% in October and then raise it by 25 basis points in December, as inflation remains close to twice the 2% objective.

Japan Flow Dynamics: Bonds, Equities, and NISA Effects

Analysts at MUFG highlighted notable shifts in Japanese and global bond flows in September, characterizing the period as “a month of turmoil in global bond markets,” as reflected in “the selling of foreign bonds by Japanese investors.” In contrast, they noted that “foreign investors did not show the same aversion to fixed income” and instead recorded “a notable JPY 3,091bn worth of purchases of Japanese bonds.” MUFG linked this development to another BoJ rate increase in September and suggested the inflow “could be indicative of improved confidence in JGBs after three consecutive months of selling through to August.”

The bank also underscored Investment Trust activity as “telling,” pointing to “foreign equity purchases totalling JPY 1,360bn in September.” MUFG underlined that “the buying has picked up,” adding that “the 3mth sum of foreign equity purchases totalled JPY 3,949bn, a new record over a 3mth period.” According to MUFG, this Investment Trust flow “captures households buying of foreign securities via NISA accounts” and “the expanded NISA limits adopted in January 2024 continues to have a notable impact.” The bank estimated that “annualising this 3mth flow implies an outflow of close to JPY 16trn (USD 100bn) and is an increasing negative yen factor.”

Looking ahead, MUFG argued that “providing tax-free opportunities to hold JGBs could well have an impact on the flows to foreign equity markets that is so evident today and given the scale of foreign equity purchases currently would be viewed as a clear yen positive.” They described such an adjustment as “one policy initiative that would help the government reach a target of 40% of household financial assets being invested in domestic securities.” MUFG also noted that “nearly half of all household savings are parked in cash deposits and large portions of pensions and investment trusts are invested in foreign securities,” underscoring the scope for policy measures to redirect savings back toward domestic instruments.

Key Flow Figures

Technical Picture: Bearish Bias Below 100-Day SMA

On the daily chart, EUR/JPY retains a negative short-term tone as spot continues to trade below the 20-day Bollinger simple moving average (SMA) and remains significantly beneath the 100-day moving average. Price is tracking in the lower half of the Bollinger envelope, while the 14-period Relative Strength Index (RSI) sits near 39, indicating muted upside momentum and favoring sustained downside pressure unless key resistance levels are reclaimed.

On the upside, the first notable resistance is located at the 20-day Bollinger SMA around 178.20, followed by the 180.00 psychological handle. A sustained move above 180.00 could expose the upper boundary of the Bollinger band at 180.75, ahead of a more substantial cap at the 100-day moving average near 182.90.

On the downside, support is initially seen at the lower boundary of the Bollinger band around 175.65. A decisive break beneath this level would pave the way toward the October 20 low, 2025 of 175.34, and then the October 2, 2025 low at 172.27.

Japanese Yen: Structural Drivers

The article reiterates that the Japanese Yen (JPY) ranks among the most actively traded global currencies, with its valuation primarily guided by Japan’s economic performance, BoJ monetary policy, the spread between Japanese and US bond yields, and broader risk appetite.

One of the BoJ’s mandates is currency control, and it has at times stepped directly into foreign exchange markets, typically to weaken the Yen, while limiting such moves due to political sensitivities with major trading partners. The text notes that the BoJ’s ultra-loose policy between 2013 and 2024 contributed to Yen depreciation against key counterparts amid widening policy divergence with other major central banks. More recently, the gradual unwinding of that stance has lent some support to the currency.

The differential between Japanese and US yields has been another central theme, with the BoJ’s long period of very accommodative policy contrasting with the stance of the US Federal Reserve and reinforcing a wider gap between 10-year US and Japanese government bond yields, to the benefit of the US Dollar versus the Yen. The BoJ’s 2024 decision to begin phasing out ultra-loose settings, combined with rate cuts elsewhere, is described as narrowing that spread.

The article also emphasizes the Yen’s reputation as a safe-haven asset. During episodes of market stress, investors are more inclined to allocate capital to the Japanese currency, given perceptions of reliability and stability. As a result, risk-off environments are typically associated with Yen appreciation against currencies perceived as riskier.