EUR/JPY dives to two-week lows below 175.00 on hawkish BoJ comments

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The Euro drops against a firmer Yen and hits fresh two-week lows near 184.80.
Hawkish comments by BoJ officials have boosted hopes of upcoming rate hikes and are fueling yen rallies across the board.
In Europe the final HICP is expected to confirm that inflation accelerated in September.

The Euro accelerated its downtrend against the Japanese Yen on Friday, reaching fresh two-week lows at the 175.20 area so far, as the Japanese Yen rallies across the board following hawkish comments by the Bank of Japan’s policymakers.

BoJ Deputy Governor Shinichi Uchida assessed on Friday that the Japanese economy is recovering moderately and that the central bank will tighten its monetary policy further if its economic perspectives are met.

On Thursday, Governor Kazuo Ueda, in a news conference in Washington, assured that the bank has not changed its stance and that it will “adjust the degree of monetary easing if our confidence in hitting the outlook increases”.

These comments have boosted market expectations that the BoJ is ready to hike rates in the coming months, rather in December than in October, which creates a JPY-supportive monetary policy divergence with the rest of the major central banks.

In Europe, French PM Lecornu survived two no-confidence votes unexpectedly, which has given some support to the Euro. The focus now is on the Eurozone’s Harmonized Index of Consumer Prices (HICP), due late on Friday, which is expected to confirm that inflation accelerated somewhat in September.

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.