AUD/JPY gains ground to near 111.00 as BoJ signals prolonged rate hold

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AUD/JPY strengthens to near 110.90 in Friday’s early European session.
Traders expect the BoJ to hold interest rates steady for a prolonged period, weighing on the Japanese Yen.
Australia's Trade Surplus narrowed to 2,631M MoM in January, below estimates.

The AUD/JPY cross attracts some buyers to around 110.90 during the early European session on Friday. The Japanese Yen (JPY) softens against the Australian Dollar (AUD) amid uncertainty surrounding the Bank of Japan's (BoJ) interest rate path. Traders brace for the release of Japan’s Gross Domestic Product (GDP) report for the fourth quarter (Q4), which will be released next week.

BoJ Governor Kazuo Ueda indicated a likely "prolonged hold" on interest rates due to economic uncertainty from the Middle East war, despite a long-term commitment to rate normalization. Meanwhile, Japan’s Finance Minister Satsuki Katayama said on Friday that the government is ready to take steps in a timely fashion to combat the economic impact from the Iran conflict. She added that Japan is not fully exited from deflation.

Traders have priced in nearly a 5% chance that the Japanese central bank will move up borrowing costs from 0.75% this month. The probability rises to about 65% if the April meeting is included, according to Bloomberg.

On the Aussie front, a narrower-than-expected Trade Surplus might cap the upside for the AUD in the near term. Australia’s Trade Surplus shrank to 2,631M MoM in January, the Australian Bureau of Statistics showed on Thursday. This figure came in below the market consensus of 3,900M and followed December’s surplus of 3,373M.

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.