BoJ pause pressures EUR/JPY as Euro stays lower

• 1.25% rate hold: Bank of Japan decision supports Yen and weighs on EUR/JPY.
• Further Japanese monetary tightening remains possible as BoJ revises inflation targets.
• December ECB rate hike remains firmly on the table as soaring energy costs intensify European inflation risks.

EUR/JPY trades near 176.10 in Friday’s Asian session. The cross is ending a two-day run of gains as the Japanese Yen (JPY) retains its advance following the Bank of Japan’s (BoJ) decision to keep its short-term interest rate at 1.25%. In line with market expectations, the decision came at the close of the central bank’s two-day monetary policy review.

At 2.5%, the median core CPI forecast for fiscal 2026 was unchanged from July, according to the summary of the BoJ’s Monetary Policy Statement. Underlying inflation had reached levels consistent with the price target.

For fiscal 2027, the median core-core CPI forecast rose to 2.7%, compared with 2.6% in July. The board cautioned that underlying inflation could exceed its targets. Reiterating its readiness to adjust monetary policy when necessary, the BoJ stressed the need to prevent unchecked inflation from damaging the wider economy later.

A hawkish European Central Bank (ECB) policy outlook is supporting the Euro, which may help EUR/JPY recover soon despite the Yen’s current strength. Sharply higher energy costs have increased inflation risks throughout the Eurozone. For traders, this keeps a December ECB rate increase firmly on the table.

December ECB rate decision puts Euro policy path in focus

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 these views highlights continued uncertainty over the ECB’s immediate policy direction, even as expectations build that the current cycle is nearing its conclusion.