EUR/JPY dropped below 177.00, trading at approximately 176.90 during Asian hours on Wednesday, amid cautious trading ahead of the Bank of Japan’s (BoJ) policy decision. The Yen strengthened, as market participants anticipated the BoJ keeping interest rates unchanged while discussing potential conditions for future rate hikes.

US Treasury Secretary Scott Bessent urged Japan to allow interest rate flexibility, advocating against a weak Yen propped by low borrowing costs. Concurrently, US President Donald Trump met with Japanese Prime Minister Sanae Takaichi, aiming to bolster US-Japan ties through new trade agreements.

BoJ Policy Decisions

Japanese Chief Cabinet Secretary Minoru Kihara stated an expectation for the BoJ to align policy with their inflation target, ensuring close government coordination. The Eurozone saw median consumer inflation expectations decline to 2.7% for September 2025. Unemployment expectations held steady at 10.7%, reflecting a stable labour market.

The BoJ, Japan’s central bank, maintains a mandate for price stability with a 2% inflation target. Since 2013, it embraced an ultra-loose monetary policy using Quantitative and Qualitative Easing (QQE). By March 2024, the BoJ shifted from this stance, as a weak Yen and rising inflation pressured the economy, surpassing the target and signalling future monetary policy adjustments.

With the Bank of Japan’s decision just a day away, we are seeing caution drive the Yen higher. The market is clearly positioning for a more hawkish tone, even if rates remain unchanged this week. The implied volatility on one-week EUR/JPY options has risen significantly, reflecting anticipation of a sharp move following the announcement.

The fundamental policy shift that began back in March 2024 appears to be gathering momentum. We saw the BoJ’s first small rate increase in July 2025, and now with pressure from the US, the central bank has more reasons to signal further tightening. This represents a major change from the ultra-loose policies that defined the previous decade.

Trading Strategies Amid Policy Changes

For derivative traders, this suggests that buying puts on EUR/JPY could be a prudent strategy to position for continued Yen strength. A more neutral approach would be to purchase straddles, betting on a spike in volatility regardless of the direction the pair moves after the BoJ statement. This protects against a surprise dovish outcome while still capturing profits from a large price swing.

On the other side of the pair, the Eurozone inflation outlook is becoming less of a concern for the European Central Bank. This contrasts with the ECB, which has held its main rate steady for the past three meetings, signaling a clear pause. This policy divergence puts downward pressure on EUR/JPY, as one central bank is considering hikes while the other is on hold.

We should remember the extreme Yen weakness of 2022 and 2023, which was driven by widening interest rate differentials. We are now witnessing the slow unwinding of that historic trend, especially as Japan’s national core inflation has remained above the 2% target for 18 consecutive months. This persistent inflation supports the case for a stronger Yen in the weeks ahead.

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