Key Moments
- EUR/JPY trades near 184.20, snapping a four-day advance as the Yen strengthens on expectations of a near-term BoJ rate hike.
- Japanese Government Bond yields climb, with the 10-year at 2.27%, reinforcing speculation of tighter monetary conditions in Japan.
- Potential de-escalation in the Middle East and ECB vigilance on energy-driven inflation risks may offer support to the Euro.
Cross Retreats as BoJ Hike Speculation Lifts Yen
EUR/JPY trades under pressure around 184.20 during European hours on Thursday, ending a four-session winning run. The pair remains subdued as the Japanese Yen (JPY) gains traction amid rising expectations that the Bank of Japan (BoJ) could move toward a rate hike in the near term.
Those expectations are being bolstered by an oil-driven inflation shock linked to the conflict in the Middle East, at a time when major central banks globally are signaling readiness to tighten policy further in response to persistent inflationary pressures.
Japanese Bond Yields Climb, Signaling Tighter Conditions
Although the BoJ kept its policy rate unchanged in March, comments from Governor Kazuo Ueda left open the possibility of an adjustment in April. That prospect is reflected in Japanese Government Bond (JGB) markets, where yields have moved notably higher.
On Thursday, the 10-year JGB yield rose to 2.27%, breaking a two-day losing streak. Shorter-dated paper also advanced, with 2-year yields touching three-decade highs and 5-year yields reaching record levels. The broad-based increase in JGB yields points to tighter financial conditions and reinforces market expectations of higher policy rates ahead.
| Instrument | Move | Comment |
|---|---|---|
| 10-year JGB yield | Rises to 2.27% | Snaps a two-day decline |
| 2-year JGB yield | Hits three-decade highs | Signals expectations for near-term hikes |
| 5-year JGB yield | Reaches record levels | Reflects tightening financial conditions |
BoJ Minutes Highlight Scope for Further Tightening
The January BoJ Meeting Minutes showed broad agreement among policymakers that, with real interest rates still deeply negative, additional rate increases would be warranted if their economic and inflation forecasts are realized. Most participants also favored a flexible, meeting-by-meeting approach instead of committing to a preset tightening path.
Geopolitics and ECB Stance May Underpin the Euro
Despite current weakness in EUR/JPY, the cross could regain lost ground if the Euro (EUR) benefits from optimism about a potential easing of tensions in the Middle East. According to the article, the White House indicated that diplomatic efforts are underway, with the Trump administration reportedly having sent a 15-point proposal to Iran through Pakistan.
Senior Iranian officials are said to be reviewing the proposal but have shown no inclination to enter direct talks with the United States. Tehran is also expected to reject a US ceasefire initiative and instead advance a five-point plan that includes asserting sovereign control over the Strait of Hormuz.
European Central Bank (ECB) President Christine Lagarde stated that the ECB is evaluating the economic fallout from the conflict and stands ready to adjust policy at any meeting if energy-related inflation risks broaden.
Bank of Japan: Structure, Policy, and Impact on the Yen
The Bank of Japan (BoJ) serves as Japan’s central bank, responsible for issuing banknotes and conducting currency and monetary control to maintain price stability, defined as an inflation target of around 2%.
The BoJ adopted an ultra-loose monetary stance in 2013 to stimulate growth and lift inflation in a low-price environment. Its framework has centered on Quantitative and Qualitative Easing (QQE), involving large-scale purchases of assets such as government and corporate bonds to inject liquidity into the financial system. In 2016, the BoJ deepened this approach by introducing negative interest rates and directly managing the yield on 10-year government bonds. In March 2024, the BoJ raised interest rates, signaling a departure from its ultra-loose policy stance.
The BoJ’s extensive stimulus measures contributed to a depreciation of the Yen against major currencies. This trend intensified in 2022 and 2023 as other leading central banks sharply increased rates to combat multi-decade-high inflation, widening yield differentials and putting additional downward pressure on the Yen. The move to unwind ultra-loose policy in 2024 has partially reversed this pattern.
The decision to start normalizing policy was influenced by a weaker Yen, surging global energy prices, and a subsequent rise in Japanese inflation above the BoJ’s 2% objective. Expectations of higher wages in Japan, seen as a key driver of sustained inflation, also played a role in that policy shift.
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