Executive Summary
EUR/JPY hit an all-time high of ¥186.87 on 23 January 2026 before retreating to 183.36 as of 11 March 2026 — a decline of approximately 3.5 figures from the cycle peak, with the pair now sitting at the intersection of two powerful and opposing structural forces. Over the past year EUR/JPY has gained approximately 15%, driven by EUR's fiscal renaissance (Germany's €500bn infrastructure fund), JPY's persistent carry-funded weakness, and global risk appetite supporting yen-funded trades. The dominant bilateral narrative has been fractured by the Iran conflict: the yen's safe-haven demand and Japan's acute energy import vulnerability are partially cancelling, while EUR simultaneously suffers from energy-driven external balance deterioration and benefits from fiscal-driven growth repricing. The pair is a moderate-carry vehicle (+125bps EUR over JPY) sitting atop structurally misaligned valuations — EUR/JPY is approximately 41% above OECD PPP fair value of ~¥130 — and operates as a moderate risk-on/risk-off barometer with strong sensitivity to both global equity direction and BoJ normalisation pace.
A short, sharp equity correction is probably the most likely route to a lower EUR/JPY in 2026. Our headline view is tactical neutral-to-bearish (conviction 2/5) and strategic bearish (conviction 3/5): the ECB-BoJ rate differential compression path from +125bps toward near-zero over 12-18 months, combined with JPY's mean-reversion potential from the 0th-percentile REER, creates a structural headwind for the pair that the Iran-driven energy shock only partially offsets. The primary caveat is timing: the super central bank week (18-19 March) and Shunto results dominate the tactical horizon and could produce 300-500 pip moves in either direction.