The EUR/JPY pair has been actively falling for a second consecutive week. If last week buyers refreshed a local high at 185.70, on Tuesday, sellers pushed price down to 177.80, updating a 10-month low. In less than two weeks, the cross lost nearly 800 pips on the wave of the southbound trend. The character of price movement suggests not so much a technical correction after a prolonged rise as a large-scale re-pricing of monetary expectations in favor of the Japanese currency.

The trigger for the decline in EUR/JPY was a sharp rise in hawkish expectations about further Bank of Japan action. Unexpectedly hawkish comments from economic adviser to the prime minister Takuji Aida provided strong support for the yen. Previously, Aida was seen as one of the more cautious proponents of rate increases, but he moved his forecast for the next hike from January 2027 to this September. Moreover, he allowed for another tightening round at one of the three subsequent BOJ meetings (likely December or January).

This is an important signal that, even within traditionally dovish political circles, the understanding of the need to tighten policy is growing amid persistent inflationary pressures and yen weakness. Aida's position carries additional weight because he is not just an expert but an economic adviser to the head of government.

Hawkish signals also came from BOJ Governor Kazuo Ueda, who in late August made it clear the central bank is ready to consider a rate hike. Deputy Governor Ryozo Himino also emphasized inflationary risks, and board member Hajime Takada urged abandoning a "too mechanical" normalization schedule in favor of a "more flexible" pace tied to price dynamics (notably, Takada was the only board member to vote for a 25 bp hike in July).

This came alongside accelerating inflation in the capital. Tokyo core CPI (excluding fresh food) rose 1.8% y/y in August (from 1.7% in July). Overall Tokyo CPI rose to 1.9% in August (up from 1.8% in July). Tokyo CPI leads national inflation and serves as a forward indicator for Japan; sustained price growth in the capital points toward inflation approaching the BOJ's 2.0% target.

The cherry on top was the wage data. In July, wages rose 2.4% y/y, well above the 1.8% forecast — the highest reading since May 2021. The indicator has shown a steady upward trend for seven months. Total cash earnings rose 4.7%, the largest increase since January 1997 after a revised 4.0% rise in June. Core wages also accelerated to 4.1%. In short, a fairly robust "wages –consumption –inflation" linkage is forming — a dynamic the BOJ watches closely.

Together, these signals materially increased the probability that the BOJ will not limit itself to a single September hike. The market is actively pricing further normalization of monetary policy — possibly already by the end of this year. This is critical for the yen because a revision of rate-trajectory expectations can accelerate the unwinding of carry-trade positions and therefore boost demand for Japanese currency.

The European Central Bank is also preparing to raise rates at its September meeting — which occurs in a couple of days. The market has almost fully priced that decision, so the ECB's rate hike alone will not drive EUR/JPY higher.

A reversal could occur if the ECB hints at an additional hike after September. That scenario looks unlikely, and if it did happen, it would trigger strong volatility in favor of the euro. The recent eurozone inflation report explains the low probability of this scenario: headline CPI accelerated to 3.3% y/y due to energy, but core inflation unexpectedly slowed to 2.4%, indicating no sustained rise in underlying price pressure. That lowers the likelihood of further near-term hikes.

Thus, the current fundamental backdrop remains unfavorable for EUR/JPY buyers and supports further declines. The only truly great positive surprise for cross-sellers would be a clear ECB signal of readiness to raise rates again in coming months. In current conditions, that outcome is a kind of "black swan" that could sharply shift the balance of power. Still, it cannot be completely ruled out. Therefore, ahead of the ECB meeting, it makes sense to take profit on short positions and temporarily stay out of the market. Too-hawkish results from the September meeting could materially redraw the fundamental picture for EUR/JPY, changing the current balance between the euro and the yen.