EUR/JPY slides to mid-158.00s after BoJ policy decision, lacks follow-through

The EUR/JPY cross ticks lower after the Bank of Japan (BoJ) announced its policy decision this Friday and moves away from over a two-week high, around the 160.00 psychological mark touched the previous day. Spot prices drop closer to mid-158.00s in the last hour, though remain confined in the previous day's broader range.

As was widely anticipated, the Japanese central bank maintained the short-term interest rate target in the range of 0.15%-0.25% at the end of a two-day monetary policy review meeting. In the accompanying policy statement, the BoJ noted that Japan's economy will achieve growth above potential and that inflation is likely to be at a level generally consistent with the price target. This, however, fails to provide any meaningful impetus to the Japanese Yen (JPY), though hawkish BoJ expectations continue to act as a headwind for the EUR/JPY cross. 

In fact, the recent comments by a slew of BoJ officials suggested that the Japanese central bank will hike interest rates again by the end of this year. The bets were reaffirmed by the latest consumer inflation figures released earlier this Friday, which showed that Japan's headline CPI rose from 2.8% in the prior month to the 3% YoY rate in August, hitting a 10-month high.  Adding to this, the Core CPI, which excludes volatile fresh food prices, edged higher to 2.8%, or a 10-month high amid a sustained pick-up in consumption on the back of higher wages. 

In contrast, the European Central Bank (ECB) last week indicated a declining path for borrowing costs in the months ahead after cutting interest rates for the second time this cycle. However, reports that the ECB  policymakers see an interest rate cut in October as unlikely, barring a major deterioration in the outlook for growth, along with a bearish US Dollar (USD), lends some support to the shared currency. This, in turn, should limit losses for the EUR/JPY cross, which remains on track to register weekly gains for the first time in the previous three.