Australian Dollar strengthens against Japanese Yen due to carry-trades

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AUD/JPY holds gains as heavy carry-trade demand favors short-JPY positions due to wide global interest rate differentials.
Japan’s Katayama warned that Tokyo is prepared to counter currency volatility.
RBA Governor Bullock warned that inflation remains too high and further interest rate hikes cannot be ruled out.

AUD/JPY holds gains after experiencing volatility, trading around 113.10 during the European hours on Monday. The currency cross remains heavily bid as the Japanese Yen (JPY) continues to lose ground to widespread carry-trade activity. Investors are aggressively favoring short-Yen positions, driven by the stubbornly wide interest rate differential between Japan and other economies.

The Japanese Yen depreciates despite a fresh round of verbal warnings from Tokyo. On Monday, Japan’s Finance Minister Satsuki Katayama emphasized that authorities stand ready to respond appropriately to volatile currency movements at any given time. However, Katayama strictly declined to comment on specific exchange rate thresholds, offering little immediate relief to the beleaguered Yen.

The upside of the AUD/JPY cross is restrained as the Australian Dollar (AUD) struggles on uncertainty over US-Iran peace talks. Market sentiment initially soured following reports that US President Donald Trump threatened direct strikes on Iran if proxy attacks on Israel continue.

However, severe risk aversion was partially checked after mediators Qatar and Pakistan issued a joint statement from Switzerland announcing that both Washington and Tehran have agreed to a formal roadmap aimed at securing a final peace agreement within the next 60 days.

The People’s Bank of China (PBOC) opted to keep its benchmark one-year and five-year Loan Prime Rates (LPRs) unchanged at 3.00% and 3.50%, respectively. Given the close trading relationship between China and Australia, this decision could directly impact Australian market sentiment.

Meanwhile, domestic policy may continue to offer underlying support for the AUD. After holding the cash rate steady this month, Reserve Bank of Australia (RBA) Governor Michele Bullock emphasized that inflation remains too high, warning that further rate hikes cannot be entirely ruled out.

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.