EUR/JPY drops as Yen strengthens on BoJ rate hike signals, ECB pause

• EUR/JPY declines as the Japanese Yen gains amid speculation of an upcoming Bank of Japan rate hike.
• Uncertainty remains over the timing of the next BoJ move, with Prime Minister Takaichi expected to pursue expansionary fiscal policies.
• The Euro may find some support as markets expect the European Central Bank to maintain its current stance.

EUR/JPY trades around 176.30 on Tuesday at the time of writing, down 0.70% for the day. The pair extends its decline as the Japanese Yen (JPY) benefits from recent remarks by Bank of Japan (BoJ) Governor Kazuo Ueda, who hinted at a possible rate hike as early as December or January. These hawkish signals strengthen expectations of a gradual normalization of monetary policy after years of ultra-loose conditions.

However, uncertainty remains regarding the timing of the next hike. Japan's new Prime Minister, Sanae Takaichi, is expected to adopt aggressive fiscal stimulus measures, which could prompt the BoJ to proceed cautiously to avoid undermining economic growth. Finance Minister Satsuki Katayama also noted that she no longer maintains her previous assessment that the Japanese Yen's fair value lies around 120-130 per dollar, stressing that her current focus is on currency stability.

In Europe, the Euro (EUR) finds relative support. The European Central Bank (ECB) kept interest rates unchanged for the third consecutive meeting last week, and markets now expect a prolonged pause. Recent data show inflation hovering near the ECB's 2% target and a modest improvement in business sentiment.

Recent comments by Bank of France Governor François Villeroy de Galhau and Latvian central banker Martins Kazaks reinforced the view that inflation and growth risks are now more balanced, suggesting the ECB will likely remain on hold in the coming months.