EUR/JPY climbs above 161.50 amid a slight uptick in global risk sentiment

• EUR/JPY strengthens as the JPY weakens amid shifting safe-haven flows and an improvement in global risk sentiment.
• Japan's top companies are poised to implement substantial wage hikes for the third straight year to help workers cope with inflation.
• The Euro gains as the Franziska Brantner-led German Green Party may back the approval of a defense spending deal.

EUR/JPY continues its upward momentum for the second consecutive day, trading around 161.60 during Wednesday's Asian session. The pair strengthens as the Japanese Yen (JPY) weakens amid concerns that US President Donald Trump may introduce new tariffs on Japan.

Additionally, the JPY faces pressure due to shifting safe-haven flows and a modest improvement in global risk sentiment. Market confidence gets a boost after President Trump reversed his decision to double tariffs on Canadian steel and aluminum to 50%, a move he announced late Tuesday. However, the White House confirmed to Reuters that a 25% tariff on all imported steel and aluminum will still take effect on Wednesday, impacting key US trade partners, including Canada and Mexico.

Despite this, the JPY's downside may be cushioned as Japanese government bond (JGB) yields recently surged to a multi-year high of 1.5712 amid speculation over further rate hikes by the Bank of Japan (BoJ). BoJ Governor Ueda stated that it is natural for long-term interest rates to adjust based on market expectations for future short-term rates, emphasizing the need for clear communication regarding policy decisions. The BoJ, which raised interest rates to 0.5% in late January, is set to hold its next policy meeting next week.

Japan's largest companies are set to offer significant wage hikes for the third consecutive year, aiming to help workers manage inflation and address labor shortages, according to Reuters. Rengo, the country's largest labor union umbrella group representing 7 million members, is advocating for a 6.09% wage increase--exceeding last year's 5.85% and marking the highest level in 32 years. Some companies, such as Denso, have already agreed to record-breaking wage hikes.

The EUR/JPY cross appreciates as the Euro (EUR) outperforms its peers, buoyed by optimism that the Franziska Brantner-led German Green Party will support the approval of a defense spending deal set for discussion on Thursday. Earlier, German leaders agreed to ease the borrowing cap, known as the "debt brake," and establish a €500 billion infrastructure fund to bolster defense spending and stimulate economic growth.

Germany's fiscal plans have also led traders to reconsider expectations for the European Central Bank (ECB) to implement two additional rate cuts by the summer. ECB policymaker and Bank of Finland Governor Olli Rehn noted that forecasts and core inflation indicators suggest inflation is on track to align with the 2% target.