• EUR/JPY posts modest gains despite discussions about a potential early departure of the ECB president.
• Markets expect a limited impact on Eurozone monetary policy.
• The JPY remains pressured by fiscal concerns in Japan and prospects of increased public spending.

EUR/JPY trades around 181.85 on Wednesday at the time of writing, up 0.10% on the day, as the pair benefits from slight Japanese Yen (JPY) weakness and what is seen as a limited political impact in the Eurozone.

A Financial Times report indicates that the European Central Bank (ECB) President Christine Lagarde is considering stepping down earlier than planned, allowing French President Emmanuel Macron and German Chancellor Friedrich Merz to appoint her successor before the French presidential election in April 2027. This move would reportedly aim to shield the institution from a potential rise of far-right parties.

However, several banks believe such a scenario would have little effect on the policy outlook. Nomura argues that the impact of an early departure would be “very limited” on ECB decision-making and maintains its baseline scenario of unchanged interest rates this year, and possibly beyond. Danske Bank also highlights that European leaders have historically sought to maintain a balance between dovish and hawkish members within the Executive Board, reducing the risk of a major policy shift.

Recent comments from Governing Council members also point to stabilization. Bank of France Governor François Villeroy de Galhau stated that the battle against inflation has now been won, while adding that any decision to leave early would be personal. These remarks reinforce expectations of a near-term monetary status quo.

Investors are now turning their attention to the preliminary Purchasing Managers Index (PMI) readings from the Eurozone and Germany due on Friday, which could provide fresh clues on growth momentum and, indirectly, on future monetary policy prospects.

In Japan, the Japanese Yen remains weighed down by a mixed domestic backdrop. Although the Merchandise Trade Balance improved for the fifth consecutive month, weak fourth-quarter Gross Domestic Product (GDP) figures continue to pressure the currency. Speculation that Japanese Prime Minister Sanae Takaichi could announce large fiscal spending plans also fuels concerns about a widening deficit, a factor that is theoretically negative for the domestic currency.

In addition, the International Monetary Fund (IMF) has warned against cutting the consumption tax, arguing that such a move would erode Japan’s fiscal space and increase debt risks. Markets remain divided between hopes that fiscal policy could support growth and expectations that the Bank of Japan (BoJ) will cautiously continue its policy normalization path, which could eventually limit JPY losses.