AUD/JPY trades at 8-week low as BoJ pledges yield curve control flexibility

Key points

The Japanese Yen rallied decisively against the Australian Dollar in volatile trade on Friday, after the Bank of Japan took steps in order to make its yield curve control policy more flexible.

The BoJ left its benchmark short-term interest rate without change at -0.10% at its Friday policy meeting and also kept a 0% cap on 10-year bond yields set under its yield curve control policy.

However, the central bank said it would offer to buy 10-year Japanese government bonds at 1% in fixed-rate operations, instead of 0.5% previously.

This has been a “clear sign that BOJ will take mini-steps to tighten policy if inflation pressures remain,” Charu Chanana, market strategist at Saxo Markets, was quoted as saying by Reuters.

“Effectively, markets will test the 1% cap and that can be bullish for the yen, while global liquidity conditions could be impacted as well as yen carry trades start to reverse.”

In a carry trade, market players will usually borrow the Yen at ultra-low rates in order to purchase higher yielding currencies such as the Australian Dollar.

The yield on Japanese 10-year bonds surged to a nine-year high of 0.575%, while that on Australian 10-year Treasuries went up to 4.109%.

With regard to inflation, the annual rate is likely to slow down due to the waning effects of past increases in import prices.

After that, Japan’s CPI inflation is expected to accelerate again as the output gap improves and as wage growth speeds up, the BoJ said.

As of 7:12 GMT on Friday AUD/JPY was losing 1.33% to trade at 92.273. During the late phase of the Asian session, the minor Forex pair went down as low as 91.789. The latter has been the pair’s weakest level since June 2nd (91.114).