AUD/JPY holds near 110.50 as BoJ uncertainty weighs on Japanese Yen

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AUD/JPY holds ground after posting gains in the previous trading day, hovering around 110.50 during the Asian hours on Tuesday. The currency cross remains in the positive territory as the Japanese Yen (JPY) weakens amid uncertainty surrounding the Bank of Japan’s (BoJ) policy stance.

AUD/JPY holds firm as the Japanese Yen weakens amid uncertainty over the Bank of Japan’s policy outlook.
A senior BoJ official signaled rates will keep rising if the economic outlook remains on track.
S&P Global Australia Services PMI fell to 46.3 in March from 52.8 in February, marking a sharp contraction in activity.

A senior BoJ official signaled last week that the central bank will continue raising interest rates if its economic outlook remains intact, maintaining a tightening bias despite surveys pointing to mounting pressure on firms from higher fuel costs tied to Middle East tensions. However, traders remain uncertain about whether it will offer clear forward guidance ahead of its April 28 policy meeting.

Japan’s Finance Minister Satsuki Katayama said on Tuesday that G7 finance ministers and central bankers agreed that volatile oil prices are driving significant swings in financial and foreign exchange markets. She added that authorities have not yet estimated the cost of continuing fuel subsidies to stabilize gasoline prices, noting there are no concerns over current oil stock levels, but uncertainty remains about supporting Southeast Asian partners. Policymakers are assessing all scenarios, including both optimistic and pessimistic outlooks for oil stockpiles.

The Australian Dollar (AUD) moves little against its major peers following the release of Australia’s S&P Global Purchasing Managers’ Index (PMI) data. The seasonally adjusted S&P Global Australia Services PMI registered 46.3 in March, falling sharply from 52.8 in February. The contraction in activity was significant and marked the steepest decline since November 2023. Meanwhile, the Composite PMI declined to 46.6 in March from 52.4 in February, indicating a contraction in private sector business activity for the first time in eighteen months.

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.