EUR/JPY recovered losses and traded near 183.30 in Asian hours on Thursday. It stayed firm as the Japanese Yen weakened after the Bank of Japan kept the short-term rate at 0.75%, in line with expectations. The decision was made by an 8–1 vote. Board member Hajime Takata proposed raising the short-term rate to 1.0% from 0.75%, saying the price stability target was largely achieved, but the proposal was rejected.

Focus Turns To Ecb Decision

Focus now turns to the European Central Bank’s rate decision later on Thursday. Rising energy prices are adding to global inflation pressure, which complicates the ECB policy outlook. The ECB is widely expected to keep its “Rate On Deposit Facility” unchanged at 2.0% in March. Market pricing points to a first rate rise by September, with only a 50% chance of another by year-end. Traders have moved away from rate cut bets and are pricing in two rate rises by the end of 2026, according to Bloomberg. The Bank of Japan targets inflation of around 2% and has used QQE, negative rates, and yield control since 2013. In March 2024, the BoJ lifted rates, stepping back from ultra-loose policy. Earlier stimulus weakened the Yen, while higher inflation driven by energy prices and wages supported the shift towards tighter policy.

Looking Back To 2025

Looking back to this time in 2025, we saw the Bank of Japan hold its rate at 0.75% despite some internal pressure to hike further. The European Central Bank was simultaneously holding its own rate at 2.0%, with markets just beginning to price in future tightening. This set the stage for a year of policy divergence that has played out as we expected. Since then, the ECB has moved more decisively, raising its deposit rate to 2.50% to combat stubborn inflation, which recent data from Eurostat shows is still at 2.6%. The Bank of Japan has been more gradual, lifting its short-term rate to only 1.25% as it monitors the economy. This policy gap has helped push the EUR/JPY cross up towards the 190.00 level where it trades today. We are now closely watching the impact of Japan’s spring wage negotiations, with the latest figures showing an average increase of 4.5%, putting more pressure on the BoJ to act. However, Governor Ueda will likely remain cautious, wanting to avoid disrupting the fragile economic recovery. This continued caution from the BoJ should keep the Yen relatively soft in the coming weeks. In contrast, the ECB’s future decisions remain tightly linked to incoming inflation data, especially with Eurozone unemployment holding at a low 6.4%. Markets are now anticipating at least one more rate hike from the ECB by mid-year. This solidifies the policy divergence that favors a stronger Euro over the Yen. Given this outlook, we see opportunities in buying EUR/JPY call options with expirations one to three months out. This strategy allows traders to capitalize on potential further upside in the currency pair driven by the rate differential. It also defines the maximum risk on the position, which is prudent given the potential for central bank surprises. Create your live VT Markets account and start trading now.

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