Australian Dollar Slips as BoJ Hike and RBA Pause Loom

Key Moments

Cross Pair Moves After BoJ Decision

The AUD/JPY pair weakened toward 113.20 during Asian trading on Tuesday as the Japanese Yen (JPY) firmed against the Australian Dollar (AUD) following the latest policy move from the Bank of Japan (BoJ). Market attention is now shifting to the Reserve Bank of Australia’s (RBA) interest rate announcement scheduled for later in the day.

BoJ Lifts Rate to Highest Level Since 1995

As anticipated, the BoJ concluded its two-day monetary policy review by increasing its short-term interest rate by 25 basis points to 1.0% from 0.75%. This adjustment took the benchmark rate to its highest point since 1995. The rate decision was made by a 7-1 vote.

According to the Monetary Policy Statement, BoJ board members intend to continue raising the policy rate in line with changes in economic activity, inflation dynamics, and financial conditions.

BoJ Governor Kazuo Ueda, who is in the hospital for medical treatment, did not attend the meeting and did not participate in the vote. Deputy Governor Shinichi Uchida is scheduled to hold a press conference at 06:30 GMT to explain the decision on Ueda’s behalf.

RBA Expected to Hold Rates Steady

On the Australian side, the RBA is expected to leave the Official Cash Rate (OCR) unchanged at 4.35% at its June policy meeting on Tuesday, with money markets scaling back expectations for additional tightening. Such an outcome would represent a pause after three consecutive 25 bps increases earlier this year.

Investors will closely watch the subsequent press conference for signals from RBA Governor Michele Bullock on whether policymakers are comfortable with current settings or still prepared to act again if persistent inflationary pressures demand further action.

Key Policy Levels and Recent Moves

Bank of Japan – Background and Policy Framework

The Bank of Japan (BoJ) serves as Japan’s central bank and is responsible for setting the country’s monetary policy. Its mandate includes issuing banknotes and conducting currency and monetary control to maintain price stability, defined as an inflation objective of around 2%.

The BoJ adopted an ultra-loose monetary stance in 2013 to support economic growth and push inflation higher in a low-inflation environment. Its approach has relied on Quantitative and Qualitative Easing (QQE), which involves creating money to purchase assets such as government and corporate bonds to inject liquidity into the financial system.

In 2016, the BoJ expanded this strategy by introducing negative interest rates and implementing direct control over the yield on 10-year Japanese government bonds. In March 2024, the BoJ raised interest rates, signaling a move away from its ultra-loose policy framework.

Impact of BoJ Policy on the Yen

The BoJ’s extensive stimulus measures contributed to a depreciation of the Yen versus major currencies. This trend intensified in 2022 and 2023 as other major central banks increased interest rates sharply to battle multi-decade-high inflation, widening the rate differential with Japan and putting further downward pressure on the Yen.

Part of this weakness reversed in 2024 when the BoJ began unwinding its ultra-loose stance. The combination of a weaker Yen and higher global energy prices pushed Japanese inflation above the BoJ’s 2% target. Expectations of rising wages in Japan, a key driver of inflation, also played a role in the central bank’s decision to begin normalizing policy.