• AUD/JPY continues scaling higher for the third consecutive day amid a broadly weaker JPY.
• BoJ uncertainty, Japan-China rift, and talks of a snap election in Japan undermine the JPY.
• The RBA’s hawkish tilt contributes to the AUD’s outperformance and lends additional support.

The AUD/JPY cross attracts some follow-through buying for the third consecutive day and climbs to a fresh high since July 2024, around the 106.50-106.55 region, during the Asian session on Tuesday. Moreover, the fundamental backdrop favors bulls and suggests that the path of least resistance for spot prices remains to the upside.

Against the backdrop of the uncertainty over the timing of the next interest rate hike by the Bank of Japan (BoJ), reports that Prime Minister Sanae Takaichi may call a snap election, undermine the Japanese Yen (JPY). With Takaichi's popularity running high, a win would likely cement her authority to boost the expansionary fiscal policy. The expectations lift Japan’s Nikkei 225 to a record high, which further dents the JPY's safe-haven status and benefits the risk-sensitive Aussie.

Apart from this, a deepening Japan-China rift contributes to the JPY's relative underperformance. In fact, China last week began prohibiting some rare earth elements from being exported to Japan with immediate effect. The ban follows a diplomatic row over Taiwan and heightens supply-chain risk for Japanese manufacturers. The Australian Dollar (AUD), on the other hand, draws support from prospects of a near-term policy tightening by the Reserve Bank of Australia (RBA).

The aforementioned fundamental backdrop validates the near-term positive outlook for the AUD/JPY cross, though intervention fears warrant some caution for bullish traders. Japan’s Finance Minister Satsuki Katayama said this Tuesday that she shared concerns over the JPY's recent one-sided slide with US Treasury Secretary Scott Bessent and added that the tolerance for weakness was limited. This fuels speculations that authorities will step in to stem further JPY downfall.

Apart from this, firming expectations that the BoJ will stick to its policy normalization path might hold back the JPY bears from placing fresh bets. Adding to this, slightly overbought conditions on the daily chart could cap any further upside for the AUD/JPY cross. That said, the overnight breakout through the 105.50 intermediate hurdle and a subsequent strength beyond the 106.00 mark suggest that any corrective pullback might now be seen as a buying opportunity.