Euro extends gains, nearing 181.00 against Japanese Yen despite Ueda's hawkish comments

• EUR/JPY extends gains to levels near 181.00, as the Bank of Japan's rate hike failed to convince investors.
• Ueda expressed confidence in Japan's economic outlook and vowed to keep raising rates to tame inflation.
• The yen fell across the board as the BoJ's decision faced opposition from three committee members.

The Euro (EUR) extends gains against the Japanese Yen (JPY) on Friday, after some hesitation, amid the Bank of Japan (BoJ) Governor Ueda's hawkish rhetoric at the post-meeting press conference. The EUR/JPY pair trades at 180.85 at the early European session, on track for a 1.5% weekly gain, as the details of the BoJ rate hike have failed to convince investors.

Ueda provided some support to the Yen, stating that Japan’s economy is recovering moderately and showing confidence that it will maintain its growing pace in the near term. He also warned about the impact of the Middle East conflict and the firm wage increases on price pressures and on economic activity. 

Ueda vows further rate hikes

Against this backdrop, the BoJ chief stated that Japan’s financial conditions have been accommodative and that the “stage for policy conduct has changed”, before bowing to “keep raising rates in response to economy, prices."

These comments have provided some support to the Yen, which had dropped across the board despite the BoJ’s decision to hike interest rates to 1.25%, its highest level in 31 years.

Previously, the bank met market expectations by tightening its monetary policy and breaking the semi-annual rate hike pace, as the previous tightening move was in June. The decision, however, faced the opposition of three committee members, which cast doubt about the BoJ’s ability to keep the monetary tightening pace much longer.

Analysts at Deutsche Bank point out that the BoJ delivered “a more dovish hike than expected,” with Ayano Sato and Toichiro Asada arguing for a hold “on the grounds that Japan’s economic outlook was uncertain.” Deutsche Bank notes that both dissenters were appointed by Prime Minister Sanae Takaichi, suggesting “that this may infer less political support for the rate hike than has perhaps been indicated by US Treasury Secretary Bessent, who has been quite firm on the fact that the US and Japan are aligned.”

Deutsche Bank also highlights that August inflation data showed price pressures “remaining broadly stable and close to the central bank’s target,” providing additional reasons to BoJ doves to hold further monetary tightening.

Finally, it is worth recalling that the monetary policy decisions of the European Central Bank (ECB) and the Federal Reserve (Fed) earlier this week have watered down JPY’s competitive advantage from the BoJ’s hawkishness. This has raised the stakes for the BoJ to provide any further impulse to the Yen.