EUR/JPY attempts recovery as Japan's fiscal concerns cap Yen strength

• EUR/JPY attempts a rebound from multi-week lows.
• Concerns surrounding Japan’s fiscal situation continue to weigh on the JPY.
• Investors remain cautious amid political statements and central bank signals.

EUR/JPY trades around 183.20 on Tuesday at the time of writing, posting a modest 0.06% gain on the day, as the recovery attempt from the 182.00 area loses momentum.

The rebound in the pair comes as fears of a currency market intervention gradually ease. Speculation about a coordinated action between the Federal Reserve (Fed) and the Bank of Japan (BoJ) had supported the Japanese Yen (JPY) late last week, but the lack of immediate concrete signals is now prompting market participants to unwind defensive positions on the Japanese currency.

Nevertheless, downside potential for the JPY remains limited by persistent concerns over Japan’s fiscal stability. Announcements from Japanese Prime Minister Sanae Takaichi, particularly regarding higher public spending and tax cuts ahead of the snap lower house election scheduled for February 8, revive fears of a further deterioration in public finances. These concerns are fueling volatility in Japanese government Bond yields and remain a structural headwind for the Japanese Yen.

On the macroeconomic front, the latest producer-side inflation data in Japan point to a mild easing in price pressures, though not enough to challenge the Bank of Japan’s gradual policy normalization path. The central bank recently upgraded its economic and inflation forecasts while keeping interest rates unchanged, signaling readiness to continue tightening if conditions allow.

On the European side, the Euro (EUR) finds only limited support. Recent data from the Eurozone, including business sentiment figures from Germany, lack momentum, while investors await remarks from European Central Bank (ECB) President Christine Lagarde, scheduled for later in the day. She is, however, expected to reiterate a cautious stance, without delivering new guidance likely to materially shift monetary policy expectations.

Against this backdrop, EUR/JPY struggles to extend its upside move and remains sensitive to developments in Japanese political risk and signals from central banks, keeping the pair confined to a consolidation phase below recent highs.