EUR/JPY falls to near 158.50 due to hawkish tone surrounding BoJ’s policy outlook

• EUR/JPY depreciates as expectations grow that the BoJ will raise interest rates to tackle persistent inflation.
• Japan’s trade deficit increased to JPY 2,758.78 billion in January as annual imports surged to a 26-month high.
• The Euro remains subdued due to rising odds of more ECB’s interest rate cuts.

EUR/JPY offers its gains from the previous session, trading around 158.50 during the European hours on Wednesday. The EUR/JPY cross weakens as the Japanese Yen (JPY) gains traction amid growing expectations that the Bank of Japan (BoJ) will continue raising interest rates to combat persistent inflation.

However, the JPY’s upside may be capped due to weaker-than-expected economic data. Japan’s core Machinery Orders—excluding ships and electric power—fell 1.2% month-on-month in December 2024, marking the steepest decline in four months and reversing November’s 3.4% growth. The reading also defied market projections for a modest 0.1% gain.

Japan’s trade deficit widened sharply to JPY 2,758.78 billion in January from JPY 1,766.54 billion a year earlier, exceeding market estimates of JPY 2,100 billion. Imports surged 16.7% YoY to a 26-month high, significantly outpacing December’s 1.7% growth and surpassing forecasts of 9.7%. Exports, however, expanded at a slower 7.2% YoY, marking the fourth consecutive month of growth but missing expectations of 7.9%.

The Euro is under pressure as sluggish growth in the Eurozone fuels expectations of further interest rate cuts by the European Central Bank (ECB). Analysts predict the ECB will implement quarter-point reductions at each meeting until mid-2025, bringing the deposit rate down to 2.0%.

On Wednesday, ECB policymaker Fabio Panetta acknowledged that economic weakness in the Eurozone is proving more persistent than expected. “We anticipated a recovery driven by consumer spending, but that has not materialized,” he stated.