EUR/JPY slips to mid-158.00s after BoJ policy decision, no follow-through

• EUR/JPY attracts some sellers after the BoJ announced its policy decision on Friday.
• Japan’s central bank decided to leave interest rates unchanged, as expected.
• Traders still expect the BoJ to hike again in 2024, which provides some support to the JPY.

The EUR/JPY cross is falling after the Bank of Japan (BoJ) announced its policy decision on Friday and is moving away from a more than two-week high around the psychological 160.00 level reached the previous day. Spot prices are falling closer to the mid-158.00s in the last hour, although they remain capped in the broader range of the previous day.

As anticipated, Japan’s central bank kept its short-term interest rate target in the 0.15%-0.25% range at the end of a two-day monetary policy review meeting. In the accompanying policy statement, the BoJ noted that Japan’s economy will achieve above-potential growth and that inflation is likely to be broadly in line with its price target. This, however, fails to provide any significant boost to the Japanese yen (JPY), although dovish BoJ expectations continue to act as a headwind for the EUR/JPY cross.

In fact, recent comments from a number of BoJ officials have suggested that the Japanese central bank will raise interest rates again by the end of this year. The bets were reaffirmed by the latest consumer inflation figures released earlier this Friday, which showed that Japan’s headline CPI rose from 2.8% in the previous month to a 3% annual rate in August, reaching a 10-month high. Adding to these, the core CPI, which excludes volatile fresh food prices, rose to 2.8% or a 10-month high amid sustained growth in consumption on the back of higher wages.

Instead, the European Central Bank (ECB) last week indicated a downward trajectory for borrowing costs in the coming months after cutting interest rates for the second time this cycle. However, reports that ECB policymakers see an October interest rate cut as unlikely, barring a major deterioration in the growth outlook, along with a US dollar (USD), are somewhat supportive of the common currency. That, in turn, should limit losses for the EUR/JPY cross, which remains on track to record weekly gains for the first time in three.