The EUR/JPY pair is showing upward dynamics, offsetting losses of the previous three weeks. The rise is driven primarily by yen weakness amid the possibility of a political crisis in Japan, though the euro also contributes amid slowing inflation in the eurozone.

According to available information, Sanae Takaichi, leader of Japan's ruling Liberal Democratic Party (LDP), plans to dissolve the lower house of parliament and call early elections that could take place as early as next month. Preliminary reports indicate the prime minister may announce this decision next Friday, January 23.

Recall that the LDP currently does not hold an absolute majority in either chamber. The failed "experiment" of Takaichi's predecessor, Shigeru Ishiba, who sought to strengthen his position through early elections, left the LDP dependent on coalition partners (currently governing in coalition with the Japan Innovation Party). Ishiba expected that snap elections would consolidate his political position and grant greater freedom of action, but that proved to be a fatal mistake that led to his political collapse. As a result of the vote, the LDP lost its majority in the lower house (for the first time since returning to power in 2012). And when upper-house elections were held last July, the ruling coalition lost its majority there as well.

Takaichi is attempting to repeat that path but with a different, more favorable outcome for her. According to recent Nikkei polls, the prime minister's approval rating is at 60–70%, one of the highest figures in history. It appears the prime minister plans to "seize the moment" to restore LDP control over both chambers of the national parliament.

Despite Takaichi's political success (largely due to her hardline foreign-policy stance), many experts consider the decision to dissolve parliament overly risky. Domestic issues remain: weak economic conditions (Japan's GDP fell by 0.6% in Q3 last year), intraparty contradictions, yen depreciation, and inflation. Real wage growth is clearly lagging behind consumer-price growth — in real terms, wages continue to show a downward trend. Price growth has exceeded the Bank of Japan's target for 44 consecutive months.

Rising tensions with China are also unpopular with many, given potential consequences for tourism and political fallout — especially after the prime minister's high-profile statement that possible Chinese military action against Taiwan would be considered "a situation threatening the existence of the country," a classification that gives Tokyo legal grounds to invoke the right to self-defense.

All this suggests non-negligible risks that Takaichi could repeat Ishiba's fate: a bold initiative that ultimately backfires, costing the party its parliamentary majority (and possibly the premiership).

The yen reacted negatively to the news of a potential dissolution. In times of political turbulence, the Bank of Japan is unlikely to raise interest rates, despite Kazuo Ueda's hawkish comments in late December indicating the central bank would continue to raise the policy rate. Yen weakness allows EUR/JPY buyers to push higher and renew local price highs.

The cross is rising not only because of yen weakness. The euro also shows resilience despite a slowdown in headline CPI. Core inflation remains relatively high (especially in services at 3.4%), meaning price pressure in the eurozone has not disappeared. Services and durable goods are the main contributors to price growth, reflecting wage and production pressures on the economy. The recent drop in energy prices is temporary and does not eliminate the structural inflation that persists in major regional economies, including Germany and France. All this suggests the European Central Bank is likely to remain on hold in the foreseeable future, at least in the first half of the year.

The current fundamental backdrop supports further upward moves in EUR/JPY toward resistance at 185.00. Technicals also favor the northbound scenario: on all higher timeframes (H4 and above), the pair is either at the upper band or between the middle and upper lines of the Bollinger Bands indicator. In addition, on the D1 and W1 timeframes, the Ichimoku indicator has produced one of its strongest bullish signals — the "Parade of Lines." The nearest (and primary) target for the upward move is 185.00, which corresponds to the upper Bollinger Band on the daily timeframe.