Australian Dollar softens against Japanese Yen as BoJ hikes rate to highest since 1995

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AUD/JPY weakens to near 113.20 in Tuesday’s Asian session.
BoJ raised the interest rate by 25 bps to 1.0% as expected, the highest since 1995.
RBA is anticipated to hold its key interest rate steady at the June policy meeting.

The AUD/JPY cross loses traction to around 113.20 during the Asian trading hours on Tuesday. The Japanese Yen (JPY) edges higher against the Australian Dollar (AUD) following the Bank of Japan (BoJ) interest rate decision. The attention will shift to the Reserve Bank of Australia (RBA) interest rate decision later in the day.

As widely expected, the BoJ decided to raise the short-term interest rate by 25 basis points (bps) to 1.0% from 0.75% after concluding the two-day monetary policy review meeting on Tuesday. The BoJ makes a rate decision by a 7-1 vote. According to the Monetary Policy Statement, the board members will continue to increase the policy rate in response to developments in economic activity, prices and financial conditions.

BoJ Governor Kazuo Ueda, who is hospitalized for medical treatment, missed the meeting and did not vote. Deputy Governor Shinichi Uchida will hold a press conference on Ueda's behalf at 06:30 GMT to explain the policy decision.

On the Aussie front, the RBA is set to keep the Official Cash Rate (OCR) on hold at 4.35% at its June policy meeting on Tuesday, with money markets paring bets on further tightening. This would be a pause following three consecutive 25 bps rate hikes earlier this year. Traders will closely monitor the press conference to see whether RBA Governor Michele Bullock signals some comfort at the current rate or keeps the door open to further moves to counter stubborn price pressures.

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.