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Date: 24th January 2025.

The BoJ Hikes, But JPY Struggles To Maintain Momentum!


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The Bank of Japan has shocked the market by hiking 0.25%, the highest hike in 18 years. Despite the boost from the interest rate hike, the Japanese Yen remains far from being one of the day's top-performing currencies. Traders consider whether the outlook for the Japanese Yen is likely to change in 2025?



EURJPY - Mixed Performance After the Bank Of Japan Increased Rates!

The EURJPY only traded 0.10% lower during this morning’s Asian Session, which may seem unimportant. However, the EURJPY has fallen 0.50% since the Bank of Japan’s rate decision was made public. Investors are considering if the EURJPY will see a change in trend and decline downwards after increasing in value throughout the week. Technical analysts advise even though the Japanese Yen may perform well in 2025, the currency may struggle in the short term.

In terms of economic and monetary policy influences the EURJPY potentially can come under pressure and move in favor of the JPY. This is mainly due to the market expecting the European Central Bank to cut 100-basis points in 2025. In addition to this, economists also believe the Bank of Japan will hike again in the second quarter. However, many traders believe the Japanese Yen may not see gains imminently or in the short term. Particularly, as both the French and German PMI data rose above previous expectations.



Bank of Japan - How High Will Rates Rise?

The Bank of Japan decided to adjust interest rates by 0.25%. The central bank's policy rate rose from 0.25% to 0.50% bringing the rate to a 17-year high. The hike is an important move for the Bank of Japan as it is the first time they have hiked 0.25% since 2007. Of the 9 members who voted on interest rates, 8 voted to hike and only 1 voted against.

The rate decision is known to be positive for the JPY, but the press conference that followed also provided further support. Governor Ueda’s forward guidance on inflation and the economic outlook was largely positive. Amongst the positive tone were the Governor’s insights into the wage negotiations.

Last year, Japanese companies agreed to a 5.1% wage increase, the largest in 30 years. It was for this reason, the Bank of Japan was able to go from negative interest rates to where we are today. The Bank of Japan’s interest rates had been at 0.00% or lower, since 2010. For 2025, the trade union is pushing for at least a 5% hike overall and a 6% increase for smaller companies to reduce income gaps with larger firms. The Governor stated that these negotiations are progressing smoothly and that companies are likely to continue to increase wages.

The governor also advised the costs of imports are increasing due to a weak Japanese Yen and indicated that this is something the Central Bank wishes to correct. The Governor said the central bank would like rates to rise to the neutral range. However, this range is normally known to be between 1% and 2.5%. In the upcoming weeks, investors will be attempting to determine how high rates can go over the upcoming months.

EURJPY - Strong European PMI Data Supports the Euro!

The EURJPY exchange rate will also largely depend on the EUR and the European Central Bank. The European Central Bank will announce its rate decision on the 30th. Economists expect the ECB to cut 0.25% and indicate a full 1.00% cut in 2025. The bearishness of the ECB will also be a key factor in the pricing of the EURJPY.

The Euro is the best performing currency of the day after obtaining further support from the French and German PMI release. The French Services PMI read 45.3, higher than the 42.4 expectations. German Services and Manufacturing PMI also rose above expectations and read higher than the previous month. Below traders can view today’s analysis of today's PMI reports.

Speaking at the World Economic Forum in Davos amongst other bankers was José Luis Escriva, Governor of the Spanish Central Bank. Mr Escriva emphasized that the ECB should tailor its policy to remain neutral, neither slowing nor stimulating economic growth. He also stressed the importance of maintaining flexibility amid geopolitical uncertainty and adapting to new developments. However, most European bankers have warned that tariffs from the US would result in a pause.

Key Takeaways:

* The Bank of Japan increases interest rates by 0.25%, the strongest hikes in 18 years.
* The BoJ Governor advises wages in Japan will rise in 2025 and a weak JPY is triggering inflation.
* German Services and Manufacturing PMI also rose above expectations and read higher than the previous month.
* The Euro is the best-performing currency of the day after obtaining support from strong PMI data from Germany and France.

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Please note that times displayed based on local time zone and are from time of writing this report.

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Michalis Efthymiou
HFMarkets

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