Euro remains lower as BoJ pause puts pressure on EUR/JPY

• With the Bank of Japan holding interest rates at 1.25%, the Yen strengthens and EUR/JPY comes under pressure.
• Revisions to the BoJ’s inflation targets point to the possibility of further monetary tightening in Japan.
• A December ECB rate rise remains firmly on the table as sharply higher energy costs add to European inflation risks.

The Bank of Japan (BoJ) left its short-term interest rate at 1.25%, as markets had expected, at the end of its two-day monetary policy review. Following the decision, the Japanese Yen (JPY) retains its gains, weighing on EUR/JPY. The cross trades around 176.10 in Friday’s Asian session, ending a two-day run of gains.

According to the summary of the BoJ’s Monetary Policy Statement, the median forecast for core CPI in fiscal 2026 stands at 2.5%, matching July’s projection. Underlying inflation is reaching levels in line with the price target.

For fiscal 2027, the median core-core CPI forecast was raised from July’s 2.6% to 2.7%, while the board cautioned that underlying inflation could rise above target. Reiterating its commitment to adjust monetary policy when necessary, the BoJ stressed the need to stop unchecked inflation from damaging the wider economy further down the line.

A hawkish outlook for European Central Bank (ECB) policy is supporting the Euro, leaving scope for EUR/JPY to recover soon despite the Yen’s current strength. With soaring energy costs increasing inflation risks across the Eurozone, traders continue to see a December ECB rate rise as a distinct possibility.

Euro rate outlook keeps December ECB tightening in view

Further tightening remains the bias in market pricing, according to Scotiabank strategists. They note that "markets expect a further 25bps hike in December," although "many forecasters (including Scotia) think policymakers will halt." The gap between those views highlights continued uncertainty over the ECB’s near-term policy course, even as expectations build that the current cycle is nearing its conclusion.