EUR/JPY Slides Amid Hawkish BoJ Comments and Rising JGB Yields

The EUR/JPY cross traded in negative territory near 178.50 during early European trading hours on Wednesday, as the Japanese Yen (JPY) edged higher against the Euro (EUR). This move was largely driven by hawkish comments from Bank of Japan (BoJ) policymakers, who signaled a possible interest rate hike this month.

BoJ board member Hajime Takata stated last week that the central bank could take a more aggressive approach than expected, and that a 25-basis-point hike 'is not necessarily set in stone.' This has led to speculation that the BoJ will raise its policy rate to 1.25% from the current 1.0% at its September policy meeting.

Rabobank strategists argue that the 'clear problem relates to the use of the JPY as a funding currency,' and question whether there is room for the recent rapid unwind of JPY shorts to accelerate in the near term. They also note that an appreciating JPY would bring fresh uncertainty over whether domestic Japanese investors would have less incentive to look for opportunities abroad.