Euro surges to 16-year peak against yen

Euro rose in Asian trade on Wednesday against the yen, extending gains for the second straight session and scaling a 16-year peak following a historic policy decision by Bank of Japan.

The BOJ raised interest rates for the first time since 2007 while expecting to maintain current accommodative policy tools for the time being. 

The BOJ almost dismissed the possibility of further interest rate cuts this year, in turn dashing hopes of closing some of the policy gap with European and US interest rates. 

EUR/JPY

EUR/JPY rose 0.5% to 164.70, the highest since August 2008, with a session-low at 163.79, after rallying 1.1% yesterday, the biggest profit since late January after timid remarks by the BOJ following its rate hike.

The ECB 

On the other hand, the European Central Bank is considering the proper timing to announce the ending of the current fight with inflation and the unrolling of current policy tightening measures.

While inflation is approaching the ECB’s targets, policymakers remain concerned about a premature rate cut before wages are put under control. 

Thus markets are betting on a delay of the first ECB interest rate cut until June, however the decision will eventually depend on inflation and GDP data.

The BOJ

In a historic decision, the Bank of Japan finally exited eight years of negative rates, and raised them by 20 basis points to below 0.1%, the first such increase since 2007.

The BOJ asserted that any upcoming interest rate hike will be modest, and it expects to “maintain current accommodative conditions for the time being”. 

BOJ Governor Kazuo Ueda said he doesn’t expect interest rates on deposits or borrowing to rise sharply next year. 

Interest Rate Gap

The current Europe-Japan interest rate gap stands at 450 basis points and is expected to hold at this level for an extended duration.