EUR/JPY rises sharply as Japanese Bond yields surge, Eurozone inflation steadies

• EUR/JPY moves sharply higher as the Japanese Yen weakens amid a surge in Japanese government bond yields.
• Expectations of a larger Japanese fiscal stimulus fuel concerns over fiscal slippage and drive yields higher.
• Eurozone inflation moves closer to the ECB's 2% target, supporting the Euro's stability.

EUR/JPY trades around 180.90 at the time of writing, up 0.45% on the day, reaching a new multi-year high amid intensifying pressure on Japanese government Bonds. The move is primarily driven by a steep depreciation of the Japanese Yen (JPY) as yields on Japan Government Bonds (JGBs) jump to 1.77%, their highest level in over 17 years.

The surge in yields follows renewed expectations of a more ambitious economic stimulus package in Japan. Remarks from Finance Minister (FM) Satsuki Katayama, who emphasized the government's focus on boosting growth without specifying the size of the package, were interpreted as a signal of further debt issuance. A factor that immediately weighs on JGBs. According to BBH FX analysts, rising long-term Japanese yields reflect fiscal concerns and worsening Japan-China diplomatic tensions.

These tensions escalated after Chinese Foreign Ministry spokeswoman Mao Ning warned that China would take "serious countermeasures" if Tokyo refused to retract Prime Minister Takaichi's recent comments on Taiwan. Such geopolitical friction adds to the selling pressure on JGBs and mechanically drags the JPY lower.

The upward momentum in EUR/JPY is also supported by the relative stability of the Euro (EUR) following the latest inflation figures in the Eurozone. In October, the Harmonised Index of Consumer Prices (HICP) rose 0.2% MoM, while annual inflation eased to 2.1%, nearly aligned with the European Central Bank (ECB)'s 2% target. Core HICP held at 2.4%, reinforcing expectations that the ECB may keep policy on hold for an extended period, providing a firm backdrop for the Euro.

Against this backdrop of widening divergences, with Japanese fiscal and diplomatic tensions pushing yields higher, while Eurozone inflation continues to slow, EUR/JPY extends its climb and remains firmly supported near the 181.00 level.