EUR/JPY edges lower as BoJ hawkish tone boosts Yen, ECB limits Euro downside

EUR/JPY trades around 183.50 on Tuesday at the time of writing, down 0.15% on the day, amid thin trading volumes as markets head toward the year-end holidays. The pair reflects a modest rebound in the Japanese Yen (JPY), supported by increasingly hawkish signals from the Bank of Japan (BoJ).

The Japanese Yen finds support following the release of the BoJ Summary of Opinions from its December monetary policy meeting. The document shows that several board members believe monetary policy should remain on a tightening path in 2026. One member noted that there is still a considerable distance to neutral interest rate levels, arguing in favor of further rate increases spaced a few months apart. Other policymakers also said that additional hikes are necessary to help support the Japanese currency.

At that meeting, the Bank of Japan raised its policy rate by 25 basis points to 0.75% from 0.50%, marking its highest level in 30 years. Last week, BoJ Governor Kazuo Ueda had already emphasized the need to continue normalizing monetary policy, citing tighter labor market conditions and changes in wage- and price-setting behavior by firms, which he sees as signs that inflation has sustainably returned toward the 2% target.

Several officials also argue that the persistent weakness of the Japanese Yen and the rise in long-term yields are partly due to policy rates remaining too low relative to inflation. This assessment strengthens expectations of further monetary adjustments. In addition, Japan’s Finance Minister Satsuki Katayama recently said that Japan has full flexibility to respond to excessive movements in the Japanese Yen, leaving the door open to verbal intervention that could help underpin the currency.

On the Euro (EUR) side, downside pressure remains limited. Markets interpret recent signals as suggesting that the European Central Bank (ECB) rate-cut cycle is coming to an end. The central bank kept interest rates unchanged in December and indicated they are likely to remain steady for some time. ECB President Christine Lagarde stressed that the high level of uncertainty prevents the central bank from providing clear forward guidance, favoring a data-dependent, meeting-by-meeting approach. Money markets currently price in less than a 10% chance of a 25-basis-point rate cut in February.

Against this backdrop, the modest pullback in EUR/JPY mainly reflects a moderate strengthening of the Japanese Yen following the Bank of Japan’s hawkish signals, while the European Central Bank’s cautious stance helps limit the pair’s downside.