EUR/JPY extends its uptrend to around 183.00 on Friday as the Japanese Yen (JPY) weakens, following the Bank of Japan (BoJ) monetary policy announcement. The pair rose further after the Bank of Japan raised interest rates by 25 basis points to 0.75%.
The Bank of Japan had been expected to do so, with BOJ Governor Kazuo Ueda saying earlier this month that core inflation was sustainably close to the central bank’s 2% target.
Going forward, investors will pay close attention to BOJ Governor Ueda’s comments at his press conference scheduled for 06:30 GMT. Market participants will be looking for signals on whether the Bank of Japan will continue to raise interest rates next year, and if so, how far it could go.
Meanwhile, the Euro (EUR) is outperforming its major counterparts, following the European Central Bank’s (ECB) monetary policy announcement. The European Central Bank on Thursday decided to leave its deposit rate steady at 2%, as expected, and refrained from providing any feedback on its interest rate outlook amid uncertainty surrounding inflation expectations.
ECB President Christine Lagarde said at the press conference: “There was no discussion about a cut or rise today,” and “we simply cannot provide forward guidance given the uncertainty.” “Inflation expectations remain more uncertain than usual,” Lagarde added.
For further signals about the outlook for euro zone interest rates, investors will focus on the speeches delivered by a large number of ECB policymakers during the European and North American sessions.
Bank of Japan Frequently Asked Questions
The Bank of Japan (BoJ) is Japan’s central bank, which sets the country’s monetary policy. Its mission is to issue banknotes and implement currency and monetary controls to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan embarked on an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflation environment. The bank’s policy relies on quantitative and qualitative easing (QQE), or printing banknotes to purchase assets such as government bonds or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and eased its policy by first offering negative interest rates and then directly controlling the yields of its 10-year government bonds. In March 2024, the Bank of Japan raised interest rates, effectively reversing its ultra-loose monetary policy stance.
The massive incentives offered by the bank caused the value of the Japanese yen to decline against major currencies. This process was exacerbated in 2022 and 2023 by the growing policy divergence between the Bank of Japan and other major central banks, which chose to increase interest rates sharply to combat decades-long high levels of inflation. The Bank of Japan’s policy led to a widening of the spread with other currencies, which led to a decline in the value of the Japanese yen. This trend was partially reversed in 2024, when the Bank of Japan decided to abandon its overly accommodating policy stance.
The weakness of the Japanese yen and rising global energy prices led to an increase in Japanese inflation, which exceeded the Bank of Japan’s target of 2%. The prospect of higher salaries in the country – a key element fueling inflation – also contributed to the move.
