EUR/JPY extends decline below 157.00 on BoJ hike bets

EUR/JPY tumbles to nearly 156.55 in Thursday’s European session, down 0.85% on the day.
Hawkish BoJ expectations boost the JPY.
Investors will take more cues from the German January PPI, which is due later on Thursday.

Lallalit Srijandorn FXStreet

The EUR/JPY cross extends its downside to around 156.55 during the early European session on Thursday. The Japanese Yen (JPY) strengthens amid rising bets for additional Bank of Japan (BoJ) rate hikes. The German Producer Price Index (PPI) for January is due later on Thursday.

Japan's latest data has reinforced the BoJ's case for raising interest rates, with GDP surpassing expectations and nominal wages rising at the fastest pace in nearly three decades. According to a Reuters poll, over 65% of economists said that the BoJ could hike to 0.75% in the third quarter and the rate of pay increases in this year's labor talks are seen as 5.00% vs. 4.75% in the January poll.

BOJ Board Member Hajime Takata said on Wednesday that it’s important to continue considering gradual rate hikes, while also noting that Japan’s bond yields are moving in accordance with the market’s view of the economy. The growing speculation the BoJ will hike rates sooner rather than later lifts the JPY and creates a headwind for EUR/JPY.

On the Euro front, tariff concerns from US President Donald Trump could weigh on the shared currency. Late Tuesday, Trump said that he would likely impose tariffs of around 25% on foreign cars, while semiconductor chips and drugs are set to face higher duties. Trump didn’t provide a clear timeline for when these tariffs will come into effect but said that some of them will be enacted by April 2.

Additionally, the monetary policy divergence between the BoJ and the European Central Bank (ECB) also weighs on the Euro. "Markets imply another 75bps of ECB cuts in the next 12 months, which would see the policy rate bottom at 2.00%,” noted BBH's FX analysts.

Bank of Japan FAQs

What is the Bank of Japan?

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

What has been the Bank of Japan’s policy?

The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.

Why did the Bank of Japan decide to start unwinding its ultra-loose policy?

A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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