EUR/JPY jumps to two-week highs near 160.00 after BoJ rate decision, eyes on ECB’s Lagarde speech

EUR/JPY recovers to near 160.00 in Friday’s early European session, gaining 0.45% on the day.
BoJ’s Ueda said central bank will keep adjusting the degree of easing if our economic, price outlooks are to be realised.
Investors await the ECB’s Lagarde speech for fresh impetus.

The EUR/JPY cross gains momentum around 160.00 during the early European session on Friday. The Bank of Japan (BoJ) decided to keep its policy rate unchanged, as widely expected. However, the uncertain outlook of the BoJ monetary policy is likely to cap the upside of the Japanese Yen (JPY) for the time being.

The BoJ kept its benchmark interest rate steady in the range of 0.15%-0.25%, the highest level since 2008, at the conclusion of a two-day meeting on Friday. “The central bank is expected to hike rates in October, and “further dial back monetary support this year despite a poor run of economic data,” noted Stefan Angrick, associate director at Moody’s Analytics.

BoJ Governor Kazuo Ueda said during the press conference that the Japanese central bank “will keep adjusting the degree of easing if our economic and price outlooks are to be realized." Ueda added that uncertainties surrounding Japan's economy and prices remain high, and he will monitor the economy and market trends with an extremely high sense of urgency.

However, he affirmed there is no change to his thinking that the BoJ will keep raising rates if the economy moves in line with the outlook. The rising expectation that the BoJ will raise the interest rate later this year could lift the JPY against the Euro (EUR).

On the other hand, the European Central Bank (ECB) reduced its interest rates last week during its September meeting. Investors will take more cues from ECB President Christine Lagarde's speech later on Friday. Any dovish remarks from Lagarde could weigh on the shared currency in the near term, while the hawkish tone might lift the EUR.

Bank of Japan FAQs

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 has embarked in an ultra-loose monetary policy since 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.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.

Is the Bank of Japan’s ultra-loose policy likely to change soon?

A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. With wage inflation becoming a cause of concern, the BoJ looks to move away from ultra loose policy, while trying to avoid slowing the activity too much.

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