AUD/JPY Drops on Stronger Yen, BoJ Uncertainty

Key Moments

Cross Under Pressure as Yen Firms in Thin Holiday Trade

The AUD/JPY pair is trading lower around 110.50 during early European trading on Monday, as the Japanese Yen (JPY) strengthens against the Australian Dollar (AUD). Activity is expected to be muted due to a national holiday in Japan, but traders remain vigilant for any signs of official intervention aimed at supporting the JPY.

At the same time, investors are grappling with ongoing uncertainty about whether the Bank of Japan (BoJ) will deliver another interest rate increase this month. Market participants continue to price in the possibility of a move in December or January, but there is no clear consensus.

BoJ Governor Kazuo Ueda recently reiterated that the central bank will “assess the likelihood and risks of the baseline economic and price outlook being realized” when determining the timing and pace of future rate hikes. Separately, BoJ policymaker Ayano Sato indicated support for raising rates in multiple steps through a gradual process.

Japanese Bond Flows and Their Impact on Global Yields

Strategists at Commerzbank point to a meaningful change in Japan’s participation in global fixed income markets, observing that “over the past twelve months, Japanese investors have sold JPY 5tn (around EUR 30bn) more in foreign bonds than they have purchased.” They describe this degree of sustained net selling as unusual, noting that “over the past 20 years, there have been only three episodes in which Japanese investors were significant net sellers of foreign bonds on a rolling 12-month basis: in 2013-14, in the aftermath of the pandemic in 2022-23, and over the past three months.”

In the context of recent swings in European bond markets, Commerzbank acknowledges that “Japanese investors have indeed been net sellers of long-term French bonds over the past twelve months, and cumulative net purchases since early 2014 have declined noticeably since the pandemic,” but also underscores that “they have already returned as buyers over the past three months.” On that basis, the bank concludes that “it therefore appears unlikely that Japanese investors were responsible for, or even materially contributed to, the recent dislocations in the French bond market.”

More generally, Commerzbank warns that “indirectly, however, it clearly matters for global bond markets whether Japanese investors are reliable buyers of foreign bonds month after month or whether, as has been the case over the past twelve months, they turn into net sellers,” adding that “there is likely a connection between the rise in global yields and the growing reluctance of Japanese investors to allocate money abroad.” The composition of those flows is described as important: “interestingly, however, Japanese investors have primarily been selling US bonds in recent months. From that perspective, Japanese bond flows have recently provided some support to the euro relative to the US dollar.”

BoJ’s Sato Signals Cautious Normalization Path

Sato’s recent remarks registered a 6.4/10 score on FXS Speechtracker, matching the historical average and indicating no significant deviation toward either a hawkish or dovish stance compared with typical communication. Support for a gradual adjustment of interest rates, combined with a refusal to commit to a predetermined tightening path, points to a careful and measured normalization process that tempers immediate upside potential for the Yen.

The focus on maintaining policy autonomy while remaining aligned with proactive fiscal measures suggests a steady, data-dependent approach to further tightening rather than abrupt shifts. Sato’s observation that price risks lean slightly to the upside due to higher oil prices linked to conflict in the Middle East introduces a mildly hawkish tilt, which could offer some support to the Yen on pullbacks if subsequent data confirm persistent inflation pressures.

Technical Outlook: AUD/JPY Retains Bearish Bias Below 100-Day SMA

From a technical perspective, the AUD/JPY cross maintains a bearish near-term stance on the daily chart, trading below both the Bollinger middle band and the 100-day Simple Moving Average (SMA). The pair is confined to the lower portion of the recent Bollinger envelope, while the 14-period Relative Strength Index (RSI) hovers around 46, remaining under the neutral 50 threshold. This configuration points to prevailing downside pressure even though the pair has not yet reached oversold territory.

On the upside, the immediate resistance is situated at the Bollinger middle band and 20-period SMA near 110.60. A move higher from there would bring the August 10 low at 111.63 into focus, ahead of the upper Bollinger band at 112.10 and the 100-day SMA at 112.40.

On the downside, the first important support lies at the psychological 110.00 level. A decisive break below this threshold could expose the lower Bollinger boundary around 109.05, followed by the October 1 low at 108.71. A sustained move under that latter level would open the door to a more pronounced decline.

Japanese Yen: Key Drivers and Market Role

The Japanese Yen (JPY) is among the most actively traded currencies globally. Its valuation is influenced by the overall performance of the Japanese economy and, more specifically, by Bank of Japan policy decisions, the spread between Japanese and US bond yields, and prevailing risk sentiment in financial markets, among other elements.

One of the BoJ’s responsibilities is managing the currency, making its actions particularly important for the Yen. The central bank has, at times, intervened directly in foreign exchange markets, typically to temper Yen strength, although such interventions are infrequent due to political sensitivities with major trading partners. The BoJ’s ultra-loose monetary stance between 2013 and 2024 contributed to Yen weakness against other major currencies as policy divergence widened. More recently, the gradual rollback of that accommodative framework has lent some support to the currency.

The yield differential between Japanese and US government bonds is another crucial factor for the Yen. Over recent years, the BoJ’s commitment to very easy policy contrasted with tighter stances at other central banks, particularly the Federal Reserve, leading to a wider spread between 10-year US and Japanese yields and benefiting the US Dollar against the Yen. The BoJ’s 2024 shift toward unwinding its ultra-loose policy, alongside rate cuts in other major economies, is now narrowing that gap.

Risk sentiment also plays a central role. The Yen is often regarded as a safe-haven asset, meaning that during episodes of market turbulence, investors typically seek the perceived safety of JPY. As a result, periods of elevated uncertainty or stress tend to support Yen appreciation relative to currencies considered riskier.