EUR/JPY dives to levels near 172.00 after BoJ’s hawkish comments

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The Euro reversal from 173.90 highs against the Yen is extending 0.73% lower so far on Tuesday, reaching one-week lows at 172.20 so far, as the JPY appreciates across the board following hawkish comments by BoJ officials.

The Euro extends losses against the Yen, as BoJ officials hint at an October rate hike.
The pair has retreated nearly 1% from Monday's highs, at 143.90.
France's political uncertainty is posing additional weight on the Euro.

A news report from Bloomberg released earlier on Tuesday, citing BoJ officials, showed lower concerns about the impact of tariffs, following the trade deal with the US, and hinted at the next rate hike as soon as October.

This report has eased concerns about the political crisis in Japan, triggered by the resignation of Prime Minister Shigeru Ishiba. Among the candidates to replace him is the former Minister for Economic Security, Sanae Takaichi, who has shown her opposition to higher interest rates, which might put the BoJ’s monetary policy into question.

In Europe, the resignation of French PM François Bayrou after the expected defeat on a confidence vote has led the Eurozone’s second-largest economy into political turmoil. President Macron’s aim to nominate a replacement in the coming days, however, has averted a strong negative impact on the Euro, at least for now.

The focus this week will be on the European Central Bank’s monetary policy decision. The bank is widely expected to leave its benchmark rate at the current 2% level, but President Lagarde’s comments will be analysed with interest to see whether there is room for further monetary easing.

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.

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