Euro Rises vs Yen as BoJ Holds, ECB Decision Near

Key Moments

EUR/JPY Supported by BoJ Status Quo

EUR/JPY is recovering earlier losses from the prior session, with the pair trading near 183.30 during Asian hours on Thursday. The cross remains underpinned as the Japanese Yen (JPY) weakens following the Bank of Japan’s (BoJ) decision to leave its short-term interest rate unchanged at 0.75%, in line with expectations. Market attention is now turning toward the European Central Bank’s (ECB) interest rate announcement scheduled later in the day.

BoJ Vote Reveals Dissent Over Rate Path

The BoJ concluded its latest meeting with an 8-1 vote to maintain its current policy settings. Board member Hajime Takata put forward a proposal to raise the short-term policy rate to 1.0% from 0.75%, arguing that the price stability target had been largely met. The majority of the board rejected this proposal, opting instead to keep the rate unchanged.

Investors are closely watching BoJ Governor Kazuo Ueda’s post-meeting comments for insight into how the central bank intends to balance the need to support an economy described as shock-hit with the risk of lagging behind on inflation dynamics.

ECB Faces Inflation Pressures and Shifting Rate Expectations

Rising energy costs are adding to global inflationary pressures and complicating the policy backdrop for the ECB. The central bank is due to unveil its latest rate decision on Thursday and is widely anticipated to keep its benchmark “Rate On Deposit Facility” steady at 2.0% in March.

According to Commerzbank strategist Hauke Siemßen, expectations surrounding the ECB are likely to be a key driver of market price action. Forwards are now fully discounting a first rate hike by September and assign only a 50% probability to an additional hike by year-end.

Markets have moved away from previous rate-cut scenarios. As reported by Bloomberg, traders are now fully pricing in two rate increases by the end of 2026, reflecting persistent concerns about inflation.

Background: Bank of Japan and Its Policy Framework

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.