EUR/JPY remains below 184.00 as traders price in BoJ rate hike odds

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EUR/JPY moves little after registering modest losses in the previous trading day, hovering around 183.80 during the Asian hours on Monday.

EUR/JPY may decline further as Japanese Yen strengthens on expectations the BoJ will tighten policy in April.
The International Monetary Fund praised Japan’s economic resilience, backing gradual stimulus withdrawal.
ECB’s Lagarde and policymakers reiterated that policy will stay restrictive until inflation sustainably returns to the 2% target.

EUR/JPY moves little after registering modest losses in the previous trading day, hovering around 183.80 during the Asian hours on Monday. The currency cross may extend its decline as the Japanese Yen (JPY) strengthens on growing expectations that the Bank of Japan (BoJ) will tighten policy in April to counter rising inflation driven by higher energy costs.

The International Monetary Fund (IMF) has backed the BoJ’s current path of rate hikes. Following a policy consultation on Friday, the IMF praised Japan’s economic resilience and supported a gradual withdrawal of monetary stimulus, with inflation projected to converge toward the 2% target by 2027.

However, the JPY faced pressure as oil prices surged after US President Donald Trump escalated threats against Iran. Japan remains particularly vulnerable to supply disruptions due to its heavy reliance on Middle East oil imports.

Trump issued a new deadline for Iran to reopen the Strait of Hormuz while intensifying threats against its power plants and civilian infrastructure. Iranian officials warned of reciprocal retaliation, targeting US-linked infrastructure, and stated the strait would stay closed until war damages are compensated.

Meanwhile, downside in the EUR/JPY cross may be limited as the Euro (EUR) finds support from the hawkish stance of the European Central Bank (ECB). ECB President Christine Lagarde and other policymakers have reiterated that policy will remain restrictive until inflation sustainably returns to the 2% target.

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.