The AUD/JPY cross loses ground around 97.05, snapping the four-day winning streak during the Asian trading hours on Friday. The cross drifts lower after the Bank of Japan (BoJ) announced its policy decision.
As widely anticipated, the BoJ decided to keep the short-term rate target in the range of 0.15%-0.25% after the conclusion of its two-day monetary policy review meeting on Friday. The Japanese BoJ remains cautious about hiking further as it could harm economic activity and hinder the demand-driven inflation that it tries to support.
However, Japanese officials will meet again in October and December, leaving the door open for more rate hikes after recent economic data revealed that inflation in Japan has come hotter than estimated. The rising speculation that the Japanese central bank will raise the interest rate again by the end of this year provides some support to the Japanese Yen (JPY) and acts as a headwind for AUD/JPY.
Data released by the Japan Statistics Bureau showed on Friday that the National Consumer Price Index (CPI) rose 3.0% YoY in August, compared to 2.8% in July. Meanwhile, the core CPI, which excludes volatile fresh food costs, climbed 2.8% YoY in August versus 2.7% prior, matching the market expectation of 2.8%.
On the Aussie front, Commonwealth Bank of Australia (CBA) analysts moved their expected timing of the first RBA rate cut from November 2024 to December 2024, with a 25 basis points (bps) rate cut expected. This, in turn, might weigh the Australian Dollar (AUD) against the JPY in the near term.
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%.
The Bank of Japan has embarked in an ultra-loose monetary policy since 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.
The Bank’s massive stimulus has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.
A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. With wage inflation becoming a cause of concern, the BoJ looks to move away from ultra loose policy, while trying to avoid slowing the activity too much.