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

• EUR/JPY comes under pressure as the Yen strengthens after the Bank of Japan keeps interest rates at 1.25%.
• Further monetary tightening in Japan remains a possibility, as revisions to the BoJ’s inflation targets indicate.
• A December ECB rate hike remains firmly on the table as soaring energy costs intensify European inflation risks.

Pressure from a firmer Japanese Yen (JPY) has ended EUR/JPY’s two-day run of gains, with the cross trading near 176.10 in Friday’s Asian session. The Yen retains its gains after the Bank of Japan (BoJ) kept its short-term interest rate at 1.25%. In line with market expectations, the decision marked the close of the central bank’s two-day monetary policy review meeting.

Underlying inflation has reached levels consistent with the price target, according to the summary of the BoJ’s Monetary Policy Statement. The median core CPI forecast for fiscal 2026 was retained at 2.5%, the same as in July.

For fiscal 2027, the median core-core CPI forecast was raised to 2.7%, compared with 2.6% in July, while the board cautioned that underlying inflation could exceed targets. Reiterating its readiness to adjust monetary policy when required, the BoJ stressed the need to prevent unchecked inflation from damaging the broader economy further down the line.

Support for the Euro from a hawkish European Central Bank (ECB) policy outlook could help EUR/JPY recover soon, despite the Yen’s current strength. With sharply higher energy costs increasing inflation risks across the Eurozone, traders continue to see a December ECB rate hike as firmly on the table.

What could a December ECB move mean for the Euro’s rate outlook?

Although expectations are growing that the current tightening cycle is nearing its end, uncertainty persists over the ECB’s near-term policy course. Scotiabank strategists point to market pricing that continues to favour further tightening: "markets expect a further 25bps hike in December," whereas "many forecasters (including Scotia) think policymakers will halt." The contrast highlights the continuing lack of clarity over the next policy steps.