Euro weakens against Japanese Yen amid firm BoJ interest rate hike prospects
- EUR/JPY declines to near 185.45 as hawkish BoJ expectations strengthen the Japanese Yen.
- Both the ECB and the BoJ are expected to raise interest rates next week.
- Japan's Economy Minister Kiuchi said that he expects consumer prices to gradually rise amid the Middle East situation.
The Euro (EUR) trades 0.22% lower at around 185.45 against the Japanese Yen (JPY) during the early European trading session on Wednesday. The cross faces selling pressure as the Japanese Yen (JPY) outperforms its peers due to firm expectations that the Bank of Japan (BoJ) will raise interest rates at the September policy meeting.
Japanese Yen Price Today
The table below shows the percentage change of Japanese Yen (JPY) against listed major currencies today. Japanese Yen was the strongest against the New Zealand Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.10% | 0.14% | -0.08% | 0.16% | -0.29% | 0.43% | 0.26% | |
| EUR | -0.10% | 0.04% | -0.17% | 0.06% | -0.37% | 0.34% | 0.17% | |
| GBP | -0.14% | -0.04% | -0.20% | 0.02% | -0.41% | 0.31% | 0.13% | |
| JPY | 0.08% | 0.17% | 0.20% | 0.23% | -0.21% | 0.52% | 0.34% | |
| CAD | -0.16% | -0.06% | -0.02% | -0.23% | -0.44% | 0.29% | 0.10% | |
| AUD | 0.29% | 0.37% | 0.41% | 0.21% | 0.44% | 0.73% | 0.55% | |
| NZD | -0.43% | -0.34% | -0.31% | -0.52% | -0.29% | -0.73% | -0.18% | |
| CHF | -0.26% | -0.17% | -0.13% | -0.34% | -0.10% | -0.55% | 0.18% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Japanese Yen from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent JPY (base)/USD (quote).
According to the August 17-24 survey in a Reuters poll, 57% of economists expected the Bank of Japan (BoJ) to raise its interest rates by 25 basis points (bps) to 1.25% in September. This is a sharp turnaround from a July poll when just 5% expected an interest rate hike.
Former BoJ board member Seiji Adachi also argued that the central bank will "probably raise its benchmark rate as early as September, followed by another potential increase in January," according to a note released by Commerzbank. The note also revealed that Adachi’s remarks have reinforced market expectations of a gradual tightening path, underscoring investor assumptions that any BoJ policy normalization will proceed cautiously rather than abruptly.
Hawkish BoJ prospects are backed by upside inflation risks. Earlier in the day, Japan's Economy Minister Minoru Kiuchi said that he expects consumer prices to gradually rise amid the Middle East situation.
Meanwhile, the European Central Bank (ECB) is also expected to raise its policy rates next month to counter upside inflation risks.
Strategists at Deutsche Bank highlight a Reuters report, which indicated that "ECB policymakers are ready to hike rates in September but that they have little appetite to signal further tightening after that." According to the bank, this messaging "appears in line with our economists’ view, who think a September hike could be effectively a done deal but that further tightening would require evidence of second-round inflationary effects which have been absent so far." The combination of a likely near-term move and a higher bar for subsequent action is seen as tempering expectations for an extended ECB tightening cycle.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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