Euro strengthens against Japanese Yen ahead of Eurozone HICP inflation data

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EUR/JPY rises after a flat previous day, trading around 186.00 during the early European hours on Tuesday.

EUR/JPY rises as traders price in a hawkish ECB stance ahead of key Eurozone inflation data.
ECB's Schnabel warned that the central bank cannot overlook the inflationary impact of the conflict in Iran.
Japan’s Katayama stated that persistent oil market volatility remains a concern, and Japanese authorities stand ready to take suitable measures.

EUR/JPY rises after a flat previous day, trading around 186.00 during the early European hours on Tuesday. The Euro gains ground against the Japanese Yen (JPY) as traders increasingly price in a hawkish stance from the European Central Bank (ECB), driving the currency cross higher ahead of crucial economic data.

Market participants are bracing for the preliminary Harmonized Index of Consumer Prices (HICP) reading from the Eurozone due later on Tuesday, which is expected to offer vital clues regarding the ECB's interest rate outlook. Headline inflation is projected to tick up to 3.2% YoY in May from 3.0% in April, and any signs of hotter-than-expected inflation could provide the shared currency with a near-term boost.

ECB Executive Board member Isabel Schnabel delivered hawkish remarks on Monday, signaling a potential need for further rate hikes. Schnabel warned that the central bank can no longer overlook the inflationary impact of the conflict in Iran, noting that price pressures have spread well beyond the energy sector and heightened the risk of unanchored inflation expectations.

Meanwhile, the Japanese Yen (JPY) continued its slide on Tuesday, weakening beyond 159.5 per US Dollar (USD). This downward move brings the currency dangerously close to the critical 160 threshold, the exact level that previously triggered direct market intervention from Japanese officials to support the domestic currency, which could limit the upside of the EUR/JPY cross.

Japan’s Finance Minister Satsuki Katayama addressed the JPY's depreciation on Tuesday, stating that persistent volatility in the oil markets remains a concern and that authorities stand ready to take suitable measures if necessary. While Katayama confirmed that ministry officials are in close communication with their counterparts in Washington regarding foreign exchange developments, she ultimately declined to comment on whether a direct currency intervention is imminent.

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.