EUR/JPY weakens as markets price near-certain BoJ rate hike

• EUR/JPY edges lower as the Yen strengthens on firm expectations of a BoJ rate hike this week.
• Markets price a 94% probability of a 25 bps BoJ rate increase on December 19.
• Eurozone Industrial Production beats expectations but offers limited support to the Euro.

The Euro (EUR) trades on the back foot against the Japanese Yen (JPY) on Monday, as the Yen strengthens broadly amid near-certain expectations that the Bank of Japan (BoJ) will raise interest rates at its December 19 policy meeting. At the time of writing, EUR/JPY is trading around 182.27, after briefly dipping below the 181.00 psychological level earlier in the day.

On the data front, the latest BoJ Tankan survey reinforced the case for policy normalization. The Tankan Large Manufacturing Index rose to 15 in Q4, matching market expectations and improving from 14 in the previous quarter, marking its highest reading since Q4 2021.

Meanwhile, the Tankan Large Manufacturing Outlook rose to 15 in Q4, beating market expectations of 13 and improving from 12 in the previous quarter, suggesting Japanese manufacturers remain confident about demand and pricing conditions heading into the new year.

In accompanying commentary, BoJ officials noted that firms remain cautious about the outlook, citing concerns over the impact of US tariffs, rising labor costs, persistent labor shortages, and signs of weaker consumption linked to higher prices.

At the same time, policymakers highlighted several supportive factors, including declining uncertainty around US trade policy, a smaller-than-expected impact from tariffs, improved cost pass-through, and robust demand tied to artificial intelligence-related chip production.

Attention now turns to the BoJ's interest rate decision on December 19, where markets are pricing in a roughly 94% probability of a 25 basis point rate hike to 0.75%. Looking further ahead, market pricing and economist surveys suggest the policy rate could rise to at least 1.00% by the end of next year.

On the Euro side, the economic calendar remains relatively light on Monday. The only notable release showed Eurozone Industrial Production rising by 0.8% MoM in October, beating market expectations of 0.1% and accelerating from 0.2% previously.

Looking ahead, attention shifts to a heavier data lineup on Tuesday, featuring the preliminary HCOB PMI surveys and the ZEW Economic Sentiment survey, which are likely to provide fresh insight into the Eurozone growth outlook. The focus then turns to the European Central Bank’s (ECB) interest rate decision on Thursday, where policymakers are widely expected to keep all three key interest rates unchanged.