Japan & Europe: a mutually beneficial friendship continues

GBP/JPY

Key zone: 205.50- 206.50

Buy: 207.00 (on a confident breakout of the 206.50 level); target 208.50; StopLoss 206.30

Sell: 205.00 (on strong negative fundamentals) ; target 203.50; StopLoss 205.70

Japan is entering a new cycle of economic transformation: it is gradually moving away from ultra-loose monetary policy, increasing government spending, and facing inflation that has, for the first time in decades, settled above the target range.

At the center of attention is the new policy of Prime Minister Sanae Takaichi, aimed at reflation, income growth, and stimulating domestic demand. The new stimulus package effectively increases the debt burden at a moment when the BOJ can no longer keep JGB yields near zero indefinitely.

These developments force EUR/JPY and GBP/JPY — the main indicators of carry-trade appetite and global risk sentiment — to react.

EUR/JPY

The pair currently maintains a bullish trend structure supported by the positive yield spread between the ECB and the Bank of Japan. Despite cooling economic activity in the eurozone, real rates in EUR remain higher than in JPY, sustaining interest in carry trades. This creates a moderately bullish backdrop for EUR against JPY, though without a dramatic widening of the yield differential.

• Over the next 1–3 months we expect movement within 176–184, with regular buying on dips and profit-taking near the upper boundary.
• Medium-term outlook is more corrective — a decline toward 172–178, and under more aggressive BOJ tightening, a deeper move into 165–170.

GBP/JPY

This pair remains the most volatile and liquid against JPY. The UK continues to show more persistent inflation and a firmer policy stance from the Bank of England. Japan’s fiscal expansion and abundant liquidity support buying GBP/JPY on pullbacks. The pair remains in a stable medium-term uptrend, and the fundamental backdrop still favors additional upside as long as no major market shocks occur.

• Short-term outlook (not for speculators!): a 202–214 range, with buying interest around 203–206 and profit-taking above 210.
• Medium-term scenario implies stabilization and a gradual decline toward 195–205; under global risk aversion — a sharper correction to 185–190.

Key fundamentals to monitor:

• Statements from PM Takaichi about new stimulus and fiscal limits;
• BOJ signals on the pace of rate hikes and the future of remaining YCC elements;
• Trajectory of inflation and wage growth in Japan.

And what is the result?

Japan’s shift toward a reflationary model increases JPY volatility. Fiscal stimulus and climbing inflation alter the yen’s traditional macro profile and heighten market sensitivity to BOJ decisions.

The rate differential remains the primary driver of EUR/JPY and GBP/JPY. As long as rates in Europe and the UK exceed Japanese rates, the crosses continue to offer income opportunities.

The medium-term trend hints at future yen strengthening. As BOJ normalizes policy, the narrowing rate spread will gradually push EUR/JPY and GBP/JPY lower.

Short-term trading favors wide-range strategies, while medium-term positioning requires managing the risk of a reversal in favor of a stronger yen.

So we act wisely and avoid unnecessary risks.

Profits to y’all!