Key Moments
- EUR/JPY trades around 186.40 in Asian hours on Tuesday, giving back gains after the Bank of Japan policy announcement.
- The Bank of Japan keeps its short-term policy rate unchanged at 0.75%, with a 6-3 vote and three board members backing a move to 1.0%.
- Economists expect the European Central Bank to leave its deposit rate at 2.0% at Thursday’s meeting amid elevated economic uncertainty.
EUR/JPY Pulls Back After BoJ Decision
EUR/JPY remains under pressure after two consecutive sessions of gains, trading near 186.40 during Asian dealings on Tuesday. The cross is holding losses following the latest policy decision from the Bank of Japan (BoJ).
BoJ Holds at 0.75% as Dissenters Call for 1.0%
After its two-day policy meeting on Tuesday, the Bank of Japan left its short-term interest rate unchanged at 0.75%, matching market expectations. The decision was approved by a 6-3 majority, with board members Nakagawa, Takata, and Naoki Tamura opposing the outcome and advocating for an increase to 1.0%.
BoJ’s Nakagawa said while the situation in the Middle East remained unclear, given economic developments, risks to prices were skewed to the upside under accommodative financial conditions. Takata said the price stability target had been more or less achieved and that risks to prices in Japan were already skewed to the upside due to the second-round effects of price rises stemming from overseas developments.
| Institution | Policy Rate / Decision | Details |
|---|---|---|
| Bank of Japan | 0.75% short-term rate | Held steady after two-day meeting; 6-3 vote, with three members seeking a hike to 1.0% |
| European Central Bank | 2.0% deposit rate (expected) | Economists anticipate no change at Thursday’s meeting |
ECB Seen on Hold Ahead of Thursday Meeting
Economists expect the European Central Bank (ECB) to keep its policy stance unchanged at its meeting on Thursday, maintaining the benchmark deposit facility rate at 2.0%, where it has been since June of last year.
ECB policymakers are viewed as likely to adopt a cautious, wait-and-see stance in the face of ongoing economic uncertainty linked to the conflict in the Middle East. ECB official Martins Kazaks said last week that “we still have the large luxury of collecting data and forming our view.”
Bank of Japan – Role and Policy Framework
The Bank of Japan (BoJ) is the central bank of Japan, responsible for setting the country’s monetary policy. Its mandate includes issuing banknotes and conducting currency and monetary control to maintain price stability, defined as an inflation target of around 2%.
The BoJ launched an ultra-loose monetary policy in 2013 to support economic activity and lift inflation in a low-inflation environment. This framework has relied on Quantitative and Qualitative Easing (QQE), under which the central bank creates money to purchase assets such as government and corporate bonds to supply liquidity.
In 2016, the BoJ intensified this approach by introducing negative interest rates and then implementing direct control over the yield of 10-year Japanese government bonds. In March 2024, the bank raised interest rates, signaling a departure from its earlier ultra-loose stance.
Impact on the Yen and Drivers of Policy Shift
The BoJ’s extensive stimulus measures contributed to a depreciation of the Japanese Yen against major currencies. This weakening accelerated in 2022 and 2023 as other major central banks sharply lifted interest rates to tackle high inflation, widening yield differentials and putting additional downward pressure on the Yen. This pattern partly reversed in 2024 when the BoJ began moving away from its ultra-loose framework.
The shift was driven by rising inflation in Japan, which moved above the BoJ’s 2% target amid a weaker Yen and higher global energy prices. Expectations of increasing wages in Japan, a key factor underpinning inflation dynamics, also played a role in the BoJ’s decision to start unwinding its previous policy stance.
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