Euro gains momentum against Japanese Yen as BoJ aligns on rate hikes

• EUR/JPY gains as BoJ raised short-term rates to 1.25%, as widely expected.
• ECB increased its key rate to 2.50% while refusing to commit to future steps.
• Both central banks highlighted ongoing Middle East conflicts as a major threat to price stability.

EUR/JPY rises after registering minor losses in the previous day, trading around 180.20 during Asian hours on Friday. The currency cross advanced as the Japanese Yen (JPY) struggled following the Bank of Japan's (BoJ) latest interest rate decision. Concluding its two-day monetary policy meeting on Friday, the BoJ board voted 7-2 to raise the short-term interest rate by 25 basis points to 1.25% from 1.00%, a move that fully aligned with market expectations.

In its monetary policy statement, the BoJ noted that accommodative financial conditions remain and that underlying inflation is gradually approaching its target. The central bank indicated it will continue raising rates alongside economic and price developments, projecting that underlying inflation will reach levels consistent with the 2% target from the latter half of fiscal 2026 through fiscal 2027. However, board members stressed the necessity of monitoring the impact of the ongoing situation in the Middle East on the economy, prices, and global financial and forex markets.

Last week, the European Central Bank (ECB) raised its key deposit rate by 25 basis points to 2.50% from 2.25%, matching investor expectations. Marking its second rate hike since the outbreak of the Iran war, the ECB reiterated that it will not pre-commit to any future policy steps.

During the announcement, ECB President Christine Lagarde cautioned that geopolitical risks continue to pressure the economic outlook. Lagarde warned that the Middle East conflict and recent developments in Russia's war on Ukraine are expected to keep headline inflation well above the central bank’s 2% target for an extended period.

Eurozone inflation steadies as ECB hawkish tone keeps hike odds alive

Strategists at Scotiabank note that the latest euro area inflation data did little to shift the policy narrative, with the “final euro area CPI release offered little in terms of surprise, with headline inflation remaining in the low 3% area and core hovering in the mid-2% range.” They add that “messaging from the ECB remains hawkish,” and highlight that markets are now “pricing just over a 50% chance of a hike in October with a cumulative 36bpts of tightening by December,” underscoring expectations that policymakers may still deliver additional restraint despite the lack of fresh inflation shocks.