Euro weakens against Japanese Yen amid firm BoJ interest rate hike prospects

The Euro (EUR) experienced a decline of 0.22% to approximately 185.45 against the Japanese Yen (JPY) during the initial European trading session on Wednesday. This downward trend is attributed to strong expectations that the Bank of Japan (BoJ) will raise interest rates at the upcoming September meeting. The Japanese Yen (JPY) has been outperforming other currencies due to these anticipations.

The table below illustrates the percentage change of the Japanese Yen (JPY) against major currencies today, with the Yen displaying the strongest performance against the New Zealand Dollar. According to a Reuters poll conducted in August, 57% of economists surveyed expected the BoJ to increase its interest rates by 25 basis points (bps) to 1.25% in September, marking a significant shift from a July poll where only 5% anticipated an interest rate hike.

Former BoJ board member Seiji Adachi further emphasized the likelihood of the central bank raising its benchmark rate as early as September, with potential increases in January, as revealed in a note by Commerzbank. This hawkish stance on the BoJ's policy is reinforced by concerns over upside inflation risks. Meanwhile, the European Central Bank (ECB) is also anticipated to raise its policy rates next month to address inflation concerns.

Experts at Deutsche Bank noted that while an ECB rate hike in September seems probable, further tightening measures will depend on evidence of second-round inflationary effects, which have not been observed thus far. The combined impact of a potential near-term ECB rate hike and a higher bar for subsequent actions is expected to mitigate the prospect of an extended cycle of ECB tightening.

Central banks' primary mandate is to maintain price stability within their respective countries or regions. These economies often face inflation or deflation as prices for goods and services fluctuate. Central banks strive to maintain demand equilibrium through policy rate adjustments. In major economies such as the United States, the European Union, and the United Kingdom, the goal is to keep inflation close to 2%.

Central banks primarily utilize the benchmark policy rate, or interest rate, to either stimulate or suppress inflation. The process of adjusting rates is known as monetary tightening when rates are increased, and monetary easing when they are reduced. When central banks raise interest rates significantly, it is referred to as monetary tightening, whereas lowering rates is termed monetary easing.

Central banks are typically politically independent, with policy board members undergoing rigorous assessments before assuming their positions. The composition of these boards includes members with varying views on monetary policy, with those favoring looser policies (lower rates and cheap lending) often referred to as 'doves,' while those advocating for higher rates and tighter control of inflation are labeled 'hawks.'

Each board member has a designated leader who presides over meetings, seeks consensus among hawkish and dovish members, and ultimately makes the final decision on policy adjustments. Central banks aim to implement monetary policy changes without causing abrupt fluctuations in rates, equities, or their respective currencies. Members are required to communicate their intentions to the market prior to policy meetings and are prohibited from discussing these matters publicly until the official announcement.

A blackout period exists between the policy meeting and the release of the new monetary stance. Sagar Dua is an expert in financial markets, having pursued post-graduation in Commerce in 2014 and begun market training with chart analysis.