AUD/JPY rises to near 105.00 as fiscal concerns weigh on Yen

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AUD/JPY rises amid fiscal concerns tied to PM Sanae Takaichi’s large-scale spending plans.
BoJ Governor Kazuo Ueda said rates will keep rising if economic and price projections are met.
The AUD finds support as expectations grow for RBA interest rate hikes.

AUD/JPY remains in the positive territory, trading around 104.90 during the Asian hours on Monday. The currency cross remains stronger as the Japanese Yen (JPY) faces pressure amid fiscal concerns over Prime Minister Sanae Takaichi’s large-scale spending plans to spur growth. Traders also watched for possible currency intervention, as business leaders urged the government to tackle the Yen’s weakness.

Bank of Japan (BoJ) Governor Kazuo Ueda reiterated that the central bank will continue raising interest rates if economic and price projections are realized. Ueda said adjusting the degree of monetary support would help achieve sustainable growth and expects Japan’s economy to maintain a cycle of moderate wage and price increases.

The upside of the risk-sensitive AUD/JPY cross could be restrained amid safe-haven demand, driven by a renewed rise in geopolitical risks following the United States’ (US) capture of Venezuelan President Nicolas Maduro.

China’s RatingDog released on Monday the Services Purchasing Managers’ Index (PMI), which declined to 52.0 in December from 52.1 in November. It is important to note that any change in the Chinese economy could impact the AUD as China and Australia are close trading partners.

The AUD may find support as expectations grow for interest rate hikes by the Reserve Bank of Australia (RBA). Traders are awaiting Australia’s Q4 CPI report on January 28, with analysts saying a stronger-than-expected core inflation print could trigger a rate hike at the RBA’s February 3 meeting.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

How do the decisions of the Bank of Japan impact the Japanese Yen?

One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.

How does broader risk sentiment impact the Japanese Yen?

The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.