EUR/JPY was little changed in Asian trading on Monday, near 183.80, after modest losses in the prior session. The pair may weaken further if the Japanese Yen gains on expectations of a Bank of Japan policy tightening in April. These expectations are linked to rising inflation pressures tied to higher energy costs. The International Monetary Fund supported the Bank of Japan’s current course of rate increases after a policy consultation on Friday.

Imf Backs Gradual Boj Tightening

The IMF also noted Japan’s economic resilience and backed a gradual removal of monetary stimulus. It expects inflation to move towards the 2% target by 2027. The Yen also faced headwinds as oil prices rose after US President Donald Trump increased threats against Iran. Japan is exposed to supply risks due to its dependence on oil imports from the Middle East. Trump set a deadline for Iran to reopen the Strait of Hormuz and threatened attacks on power plants and civilian infrastructure. Iranian officials warned of retaliation against US-linked infrastructure and said the strait would stay closed until war damage is paid. EUR/JPY losses may be capped by support for the Euro from the European Central Bank’s restrictive policy stance. ECB officials said policy will remain restrictive until inflation returns to the 2% target.

Carry Support Versus Oil Risk

We recall observing EUR/JPY around the 183.80 level this time in 2025, when the market was torn between a hawkish Bank of Japan and rising oil prices. The fundamental conflict between expected policy tightening and geopolitical risk created significant tension. That dynamic continues to shape our view on the cross today. The Bank of Japan did follow through on its policy normalization, but its pace has been exceptionally slow. With the overnight call rate currently at only 0.25% and recent core inflation holding at a stubborn 2.5%, the BoJ remains far behind its global peers. This makes the Yen an attractive funding currency for carry trades. In contrast, the European Central Bank has maintained a restrictive stance, with its main deposit rate holding at 3.50%. Eurozone inflation recently came in at 2.3%, still slightly above target, giving the ECB little reason to signal imminent rate cuts. This has preserved the wide and favorable interest rate differential that supports a higher EUR/JPY. The specific tensions involving former President Trump and Iran have shifted, but the underlying risk to energy prices has not disappeared. With Brent crude currently trading over $91 per barrel, the high cost of energy imports continues to weigh on Japan’s trade balance. This acts as a persistent, structural negative for the Japanese Yen. For the weeks ahead, traders should focus on strategies that capitalize on the significant positive carry while hedging against volatility. The clear interest rate advantage favors being long EUR/JPY, but the risk of sudden market shifts or official intervention is ever-present. A simple long spot position is therefore exposed to sharp drawdowns. We believe that using options to structure this trade is the most sensible approach. Buying EUR/JPY call options allows for participation in any further upside while strictly limiting the downside risk to the premium paid. For a more cost-effective method, consider a bull call spread to cheapen the entry. Create your live VT Markets account and start trading now.

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