EUR/JPY declines as BoJ hints at future hikes, ECB decision looms

• EUR/JPY declines despite the Japanese Yen initially being supported by a nuanced Bank of Japan message.
• Ueda keeps the door open to further hikes while stressing energy-driven uncertainty.
• The Euro remains on hold ahead of the European Central Bank decision.

EUR/JPY trades around 182.70 on Thursday at the time of writing, down 0.23% on the day, as markets digest comments from the Bank of Japan (BoJ) governor and await the European Central Bank (ECB) decision.

The Bank of Japan kept its policy rate unchanged at 0.75%, as widely expected, but Governor Kazuo Ueda’s remarks highlight an increasingly data-dependent approach. Ueda stated that Japan’s economy is likely to continue growing moderately, while acknowledging heightened uncertainty stemming from geopolitical tensions and rising Oil prices.

He noted that underlying inflation is gradually moving toward the 2% target, although it has not yet stabilized at that level. Real interest rates remain significantly low, justifying the current accommodative stance for now. However, the BoJ reiterated that it will continue to raise rates if economic activity and inflation evolve in line with its forecasts.

Ueda also emphasized the difficulty of accurately assessing inflation dynamics in the current environment, particularly given the energy shock linked to the Middle East war. He indicated that it is still too early to determine whether higher energy prices will have a lasting impact on underlying inflation, adding that the central bank will closely monitor wage negotiations and corporate pricing behavior.

This cautious communication, while slightly hawkish in direction, underscores limited short-term visibility. Ueda acknowledged that it is difficult to clearly prioritize between curbing inflation and supporting the economy, suggesting that policy adjustments will depend on evolving risks, especially if any economic slowdown proves temporary.

According to analysts, this stance limits the Japanese Yen’s upside potential in the near term, despite the prospect of further rate hikes remaining intact.

On the European side, the Euro (EUR) remains primarily driven by expectations surrounding the European Central Bank's monetary policy decision, which is due later in the day. The ECB is widely expected to keep its deposit rate unchanged at 2%, as rising energy prices complicate the inflation outlook.

Commerzbank noted that market expectations continue to shift toward a tightening scenario, with a first rate hike now priced in for September. Markets have also shifted away from expectations of rate cuts, reflecting persistent concerns about inflation.

In this context, EUR/JPY reflects a delicate balance between a cautious but gradually tightening BoJ and an ECB facing an external inflation shock. Energy prices and central bank expectations are likely to remain the key drivers for the pair in the near term.