The EUR/JPY pair maintains its strength after recording a 0.51% gain in the previous session, trading around 182.90 during the Asian hours on Thursday. The currency pair remains steady as the Japanese yen remains under pressure amid concerns about Japan’s weak financial outlook.
Japanese Prime Minister Sanae Takaishi on Wednesday stressed the need for a proactive fiscal policy to strengthen Japan’s capabilities, rather than excessive fiscal tightening. “We will achieve a sustainable fiscal policy and welfare system by reviving the economy, improving corporate profits and increasing household income through wage gains that then lead to increased tax revenues,” Takaishi said.
The yen could find support as the Bank of Japan is widely expected to raise interest rates by 25 basis points to 0.75% on Friday, with higher food prices keeping inflation above the central bank’s 2% target. Markets will be closely watching Governor Kazuo Ueda’s comments after the meeting for clues about the course of policy next year, amid speculation that interest rates could rise to 1% by July.
The Euro (EUR) rose against major currencies, as easing inflation in the Euro Zone (EZ) reduced the likelihood of further monetary easing by the European Central Bank (ECB). ECB officials have indicated that additional interest rate cuts may not be necessary in 2026.
Attention now turns to the ECB’s monetary policy meeting in December, which is widely expected to be a non-event, with President Christine Lagarde likely to keep interest rates unchanged at that meeting and throughout next year.
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.
