Australian Dollar slips against Japanese Yen as BoJ rate hike bets grow

• The Australian Dollar remains under pressure against the Japanese Yen despite Chinese inflation data meeting or exceeding expectations.
• Expectations of a rate hike in Japan and US Treasury warnings against bearish JPY bets support the Japanese currency.
• Prospects of further monetary tightening in Australia nevertheless limit the Australian Dollar’s downside.

AUD/JPY declines 0.27% on Wednesday and trades around 110.80 at the time of writing. The Australian Dollar (AUD) fails to benefit sustainably from encouraging inflation data from China, Australia’s largest trading partner, while the Japanese Yen (JPY) draws support from growing expectations of monetary tightening in Japan.

China’s National Bureau of Statistics reported that the Consumer Price Index (CPI) rose 0.8% YoY in August, in line with market expectations and accelerating from a 0.5% increase in July. On a monthly basis, CPI inflation increased 0.4%, compared with a 0.1% decline previously and above the expected 0.3% rise.

Producer price pressures also strengthened. China’s Producer Price Index (PPI) increased 3.8% YoY in August, following a 3.5% rise in July and exceeding market expectations of 3.7%. The figures help ease some concerns over weak Chinese domestic demand but fail to trigger a meaningful recovery in the Australian Dollar.

The weakness in AUD/JPY primarily reflects the strength of the Japanese Yen. United States (US) Treasury Secretary Scott Bessent warned investors against betting against the Japanese currency, saying that he has a “pretty good insight” into the Bank of Japan’s (BoJ) upcoming decisions and currency interventions.

Monetary policy expectations also support the JPY. Markets increasingly expect the BoJ to raise interest rates at its upcoming meeting, while Prime Minister Sanae Takaichi’s administration adopts a firmer stance against excessive weakness in the Japanese currency.

BoJ hike speculation revives echoes of past US-Japan policy tensions

Analysts at Rabobank highlight that “in markets, there is some speculation the BoJ might even think about a 50bps hike.” They stress that such a move “would be the first such move since 1989, when it was still in a bubble,” drawing a deliberate parallel with an earlier era “before the first Cold War had fully ended and [when] the US used national security arguments vs. its allies to achieve the likes of the Plaza Accord.”

Rabobank also underscores the increasingly overt US role in Japanese policy, pointing to comments from US Treasury Secretary Bessent, who stated: “I am the house now, so when we intervene with the Japanese Yen, I have a pretty good insight into what the Japanese, what the Bank of Japan is going to do, what Japanese policy makers are going to do. And you can bet against me if you want.” For Rabobank, such remarks underline that “if you are still talking about the independence of central banks, you are behind the curve; the world is now about the functional independence of countries within which central banks sit.”

On the Australian side, the monetary policy outlook nevertheless remains supportive of the Australian Dollar. Reserve Bank of Australia (RBA) Deputy Governor Andrew Hauser called on Tuesday for further action to contain inflation, fueling speculation about additional interest rate hikes.

RBA hawkish turn aligns with US policy preferences

Rabobank notes that the Reserve Bank of Australia has “just saw Hauser give a hawkish speech,” a shift that “has markets thinking of hikes this month and in November.” The bank adds that this prospective tightening is “very much what the US Treasury would like to see – plus a lot more action on non-housing parts of the economy,” underscoring how a more restrictive RBA stance is increasingly aligned with US policy preferences.

AUD/JPY therefore remains caught between expectations of higher interest rates in Australia and a more favorable near-term backdrop for the Japanese Yen as investors prepare for the Bank of Japan’s upcoming monetary policy decision.