AUD/JPY remains above 111.50 as higher oil prices weigh on Japanese Yen

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AUD/JPY extends its winning streak for the fourth successive session, trading around 111.70 during the European hours on Thursday. The currency cross gains as the Japanese Yen (JPY) weakens, with oil prices rebounding amid ongoing uncertainty surrounding the US-Iran ceasefire.

AUD/JPY rises as Japanese Yen weakens on oil rebound, with Japan highly exposed to Middle East supply risks.
Markets expect more expansionary BoJ fiscal policy if the Middle East conflict becomes prolonged.
Markets now expect an RBA May hike, with rates projected to reach 4.61% by year-end amid inflationary pressures.

The JPY also faces pressure as markets increasingly expect fiscal policy to turn more expansionary if the Middle East situation becomes prolonged, according to Sho Suzuki, market analyst at Matsui Securities.

Bank of Japan (BoJ) Governor Kazuo Ueda stated that short- and medium-term interest rates remain clearly negative, with accommodative financial conditions supporting a moderate rise in capital expenditure, Reuters reported.

However, the upside in the AUD/JPY cross may be capped as the Australian Dollar (AUD) struggles amid fading US-Iran ceasefire optimism, with reports indicating the 10-point framework still lacks full commitment from both sides, leaving the agreement fragile and incomplete.

The Middle East conflict, now in its second month, has pushed energy prices higher and heightened inflation risks, reinforcing expectations that global central banks may maintain tighter policy for longer.

The Reserve Bank of Australia (RBA) has already lifted rates by 50 basis points to 4.10% in response to persistently elevated inflation. Markets are now pricing in another rate hike in May, with rates projected to reach 4.61% by the end of the year.

Bank of Japan FAQs

What is the Bank of Japan?

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

What has been the Bank of Japan’s policy?

The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.

Why did the Bank of Japan decide to start unwinding its ultra-loose policy?

A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.

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