Euro rebounds vs Yen as BoJ rate hold, Eurozone inflation support

• EUR/JPY rebounds toward 184.00 following the Bank of Japan's monetary policy decision.
• The Bank of Japan keeps its policy rate unchanged at 1% while making slight adjustments to its economic forecasts.
• Stronger-than-expected Eurozone inflation provides additional support to the Euro.

EUR/JPY trades around 184.00 on Friday, stabilizing after the sharp volatility seen on Thursday. The cross plunged to near 182.00 from around 187.00, losing almost 500 pips within minutes after what appears to have been another intervention by Japanese authorities in the foreign exchange market. The Bank of Japan (BoJ) monetary policy decision is now helping to calm markets and support a moderate rebound in the pair.

As widely expected, the Bank of Japan (BoJ) left its short-term interest rate unchanged at 1% at the conclusion of its July policy meeting. The central bank slightly upgraded its fiscal 2026 real Gross Domestic Product (GDP) growth forecast to 0.6% from 0.5% previously, while lowering its fiscal 2026 core Consumer Price Index (CPI) forecast to 2.5% from 2.8% in April. The institution also highlighted the Middle East conflict as a key risk to the economic and inflation outlook, a factor that continues to weigh on the Japanese Yen (JPY).

The decision was approved by an 8-1 vote. Board member Hajime Takata was the sole dissenter, arguing in favor of another interest rate hike as he believes geopolitical tensions could generate more persistent inflationary pressures through higher energy prices and stronger demand.

Meanwhile, Japanese Finance Minister Satsuki Katayama reiterated that the authorities remain ready to intervene in the foreign exchange market at any time and confirmed that Japan continues to coordinate closely with the United States (US) on currency developments. These comments keep the risk of further intervention alive following Thursday's sharp market swings.

On the European side, the latest inflation figures are supporting the Euro (EUR). The Eurozone Harmonized Index of Consumer Prices (HICP) accelerated to 2.9% YoY in July, in line with expectations, while core inflation rose to 2.5%, above the 2.4% consensus. The data points to persistent underlying inflationary pressures.

European Central Bank (ECB) Governing Council member Martin Kocher also said that future monetary policy decisions will remain fully data-dependent. He noted that recent geopolitical developments have demonstrated how quickly energy prices can alter the inflation outlook, leaving investors focused on upcoming macroeconomic releases.

BoJ holds at 1% as Ueda turns hawkish but TD stays dovish on hike path

According to TD Securities, the BoJ “left the target rate unchanged at 1% (cons/TD: 1.0%) in an 8-1 vote after its 25bps hike last month,” in a decision that was “widely expected.” The bank notes that Governor Ueda “sounded the most hawkish that he's been in a long while,” coming “just close to short of forward guidance that September is a done deal for a 25bps hike.” TD highlights that “he repeatedly referenced the discussion of potential rate hikes and the impact of a weaker yen, which reads hawkish to us.”

Even so, TD stresses that “we are more dovish than market pricing; OIS markets are close to fully pricing in a hike in October” and that they “forecast the next 25bps in December 2026 (semi-annual pace of hikes).” The bank flags that “a risk to our forecast is that the JPY slides past the 165 level and a hike in October is needed to mitigate the FX impact.”