EUR/JPY drifts lower amid growing speculation on BOJ normalization

• EUR/JPY attracts some sellers near 163.28 on the stronger-than-expected Japanese inflation data. 
• Japan’s two-year bond yield climbed to the highest level since 2011 amid growing speculation the BoJ will abandon its negative rate policy by spring. 
• ECB’s Lagarde reaffirmed its restrictive policy stance, as the decline in headline inflation acts as a safeguard against a sustained wage-price spiral.

The EUR/JPY cross trades in negative territory after being rejected from the multi-month highs of 163.50 during the early European trading hours on Tuesday. The hotter-than-expected Japanese CPI data has prompted investors to be more cautious about the probability of the BOJ exiting negative interest rate policy at the March meeting, which provides some support to the Japanese Yen (JPY). At press time, the cross is trading at 163.28, losing 0.15% on the day. 

The Japanese government bond (JGB) yields edge higher on Tuesday after Japan’s inflation data surprised to the upside, raising speculation that the Bank of Japan (BoJ) will exit negative interest rates by June this year. This, in turn, boosts the Japanese Yen and acts as a headwind for the EUR/JPY cross. 

Early Tuesday, the Japan Statistics Bureau revealed that the nation’s National Consumer Price Index (CPI) for January came in at 2.2% YoY from 2.6% in December. Meanwhile, the National CPI ex Fresh food came in better than expected, arriving at 2.0% YoY in January versus 2.3% prior.

On the Euro front, European Central Bank (ECB) President Christine Lagarde said on Monday that inflation continues to ease toward central bank targets. However, the ECB remains committed to restrictive policy measures for the time being. Lagarde added that the fourth-quarter wage growth numbers are positive, but not enough to give the ECB confidence that inflation has been conquered.  

Investors will take more cues from the German Consumer Price Index (CPI) and Eurozone Harmonized Index of Consumer Prices this week for fresh impetus. On the Japanese docket, the Industrial Production will be due on Thursday and the Unemployment Rate will be released on Friday.