• AUD/JPY gains strong positive traction for the second straight day amid a broadly weaker JPY.
• The RBA’s hawkish stance and sustained USD selling benefit the AUD, also supporting the cross.
• Traders now look forward to the crucial BoJ decision on Friday for some meaningful impetus.

The AUD/JPY cross builds on the previous day's goodish bounce from the 105.20 area, or over a one-week low, and gains strong follow-through positive traction for the second straight day on Tuesday. The momentum pushes spot prices to the 106.80 region, or the highest since July 2024, during the first half of the European session, and is sponsored by a combination of factors.

The Japanese Yen (JPY) attracts heavy selling amid concerns that Japan's fiscal health will worsen in the wake of Prime Minister Sanae Takaichi's spending plans and acts as a tailwind for the AUD/JPY cross. The worries resurfaced after Takaichi said on Monday that she will dissolve parliament this week and hold a snap election on February 8, hoping for a stronger mandate to push through her ambitious fiscally expansionary policies.

Adding to this, a fall in demand at the 20-year debt auction triggered a broader selloff in government bonds, pushing the yield on the long-dated 40-year JGB to a record high on Tuesday and weighing on the JPY. The Australian Dollar (AUD), on the other hand, benefits from some follow-through US Dollar (USD) selling and the Reserve Bank of Australia's (RBA) hawkish stance. This contributes to the AUD/JPY pair's strong move up.

It, however, remains to be seen if bulls can retain their dominant position or opt to lighten their bets amid expectations that Japanese authorities would step in to stem further JPY weakness. In fact, Japan's Finance Minister Satsuki Katayama warned last Friday that a direct intervention is an option to deal with the recent JPY downfall. Traders might also opt to move to the sidelines ahead of the crucial Bank of Japan (BoJ) meeting.

The central bank is scheduled to announce its decision on Friday and is widely expected to maintain the status quo after raising the overnight interest rate last month to 0.75%, or the highest in 30 years. Hence, BoJ Governor Kazuo Ueda's comments during the post-decision press conference will be looked for cues about the timing of the next rate hike. This, in turn, will drive the JPY and provide a fresh impetus to the AUD/JPY cross.