EUR/JPY hits fresh record highs above 185.55 ahead of the BoJ decision

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The Euro is drawing support from a weaker Yen to reverse Wednesday’s losses and hit fresh highs at 185.75 on Thursday’s European trading session.

EUR/JPY reverts previous losses on Thursday and ¡rallies to a fresh record high at 186.75.
Concerns about Japan's fiscal stability are hurting the Yen ahead of the BoJ's monetary policy decision.
The Euro strengthens amid a favourable risk mood and de-escalating EU-US tensions.

The Euro is drawing support from a weaker Yen to reverse Wednesday’s losses and hit fresh highs at 185.75 on Thursday’s European trading session. A brighter risk mood is supporting the Euro, while the Yen remains on the defensive, as the focus shifts back to Japan's fiscal policy and Friday's BoJ Monetary Policy Decision.

The Japanese Yen depreciated against its main peers on Thursday as trade and geopolitical tensions between the US and Europe eased, while market concerns about Japan’s fiscal health remained high. Investors are wary that the February 8 snap election in Japan will grant Prime Minister Sanae Takaichi larger parliamentary support to extend its policies of large stimulus and lower taxes, adding pressure to an already strained government debt.

Meanwhile, the Bank of Japan (BoJ) kicked off its two-day Monetary Policy Meeting on Thursday. The BoJ hiked rates to a 30-year high at 0.75% in December and is widely expected to stand pat on Friday. Markets, however, will be looking for clear signs of further monetary tightening in the near future. Any other outcome might disappoint investors and send the Yen tumbling across the board.

The Euro, on the other hand, is showing a mild bullish tone, following a EUR/USD reversal after Trump’s Davos speech. The Bundesbank Monthly Report has hinted at moderate German GDP growth in Q1, improving the outlook of the Eurozone’s leading economy and providing additional support for the common currency.

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.