EURJPY is approaching a key support level, which could lead to further downside if broken. 

The rate hikes from Japan, combined with hotter economic data and a weakening Eurozone, are starting to shift the EURJPY pair’s direction. Last week’s lower jobless rate and a much higher-than-expected 3.4% Tokyo CPI signaled that inflation is rising and the job market is strengthening. 

However, this week’s wage data was particularly crucial for the Bank of Japan (BOJ). Labor cash earnings increased by 4.8%, surpassing the 3.7% forecast, while the previous data was revised sharply upward from 3.0% to 3.9%. This major revision and the steady wage growth trend since early 2021 could further boost expectations for future BOJ rate hikes. 

The BOJ is likely to proceed cautiously, ensuring it does not derail Japan’s long-awaited exit from decades of no inflation. However, it must also be mindful not to tighten too aggressively, as Japan’s record-high debt-to-GDP ratio makes higher borrowing costs a significant fiscal risk. 

BOJ policymakers have already begun delivering more hawkish messages. The latest came from Naoki Tamura, a known hawkish member of the Bank of Japan, who suggested that the BOJ should raise rates at least twice and increase them to at least 1% by the second half of the 2025 fiscal year. 

(EURJPY Daily Chart) 

EURJPY has remained mostly flat, with a slightly upward-sloping trend since mid-July. 

Excluding the rally between May and July 2024, upward moves have been largely capped. However, this could be about to change. A head & shoulders pattern has formed along the trendline—a formation that often signals an impending selloff if broken. 

The zone between 155 level and the trendline at 156.15 can be considered the neckline of the head & shoulders pattern. As long as this support holds, trading conditions remain unchanged, just as they have been since 2023. However, if the neckline breaks, EURJPY could potentially drop to 145 over the next few months.