Feb 27 (Reuters) - Changes in interest rates are closely entwined with currencies, so with the euro zone interest rate falling far and fast at the same time as Japanese monetary policy tightens for the first time in decades, EUR/JPY is going down and may drop much further.

EUR/JPY, which rose 125-175 during the European Central Bank's tightening cycle, has only surrendered part of that gain, reaching 154.37 last year, but the drop is also supported by changing monetary policy in Japan, and crucially not just interest rates but also a reduction of the bond purchases that have weighed so heavily on the yen for many years.

With two central banks combining their power, the EUR/JPY drop which has to date only met the technical target for a minor correction of the rise resulting from ECB tightening, could surrender a much larger proportion of that rise.

Interest rates in the euro zone are not expected to return to the extremely low levels reached as a result of the euro zone crisis, but the deposit rate may more than halve. Combined with BOJ changes the rate differential that once supported EUR/JPY may be reduced by 75% by the end of this year, which should be sufficient to drive EUR/JPY much lower towards the 150, 144 and 135 targets for a correction of gains inspired by ECB acting alone.
EURJPY with ECB and BOJ policy changes

(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)