Australian Dollar Pummelled in the Japanese Yen Melee Post BoJ. Where to for AUD/JPY?

Australia Dollar, AUD/USD, US Dollar, AUD/JPY, Japanese Yen – Talking Points

• The Australian Dollar sailed south at a rate of knots against the Japanese Yen
• The Banks of Japan changed the band around their yield curve control mechanism
• If the BoJ decides to tighten further, will it drive AUD/JPY to new depths?

The Australian Dollar made an 8-month low against the Japanese Yen in the last 24 hours as it dropped from 92.00 to almost touch 87.00.

The move was triggered by the Bank of Japan adjusting its yield curve control (YCC) as part of its monetary policy.

The Aussie and Kiwi Dollars were hardest hit among the major currencies in the rout due to their sensitivity to changes in the global growth outlook. Otherwise known as high beta currencies, both lost units lost around 4% against the Yen in the immediate fallout.

To recap, The Bank of Japan maintained their policy balance rate at -0.10% but adjusted its yield curve control (YCC) by targeting a band of +/- 0.50% around zero for Japanese Government Bonds (JGBs) out to 10 years. It had previously had a YCC target of +/- 0.25% around zero.

The bond market had pushed to the upper band of 0.25% for some time amid speculation that the bank would have to cede at some point in the face of accelerating inflation. The BoJ Governor Haruhiko Kuroda had remained steadfast in the lead-up to yesterday’s meeting that the policy will be robustly maintained.

The Reserve Bank of Australia (RBA) faced similar strains in their pandemic-induced YCC program. They abandoned it in November 2021 in the face of rising inflation and market pressures.

The RBA later went on further to tighten monetary policy throughout 2022 and there is a growing perception in the market that the BoJ might be heading down the same path. Mr Kuroda has denied that yesterday’s move was a tightening, but rather referred to it a ‘technical tweak’.

Up until yesterday, the BoJ was the only central bank with a free-floating currency that was not in a tightening regime.

The impacts of yesterday’s move by the BoJ appear likely to play out going into year-end and beyond. The re-pricing of several asset classes may come under scrutiny with all major central banks now restricting financial conditions to deal with high and unstable inflationary pressures.

AUD/JPY is sensitive to such changes in financial conditions due to many Australian exports being seen as mostly demand dependent on the level of global growth.

Going into year-end, there can be less liquidity in most markets and given the breakout in volatility, there could be some exaggerated moves over the next few weeks.

AUD/JPY CHART

Chart created in TradingView

— Written by Daniel McCarthy, Strategist for DailyFX.com

Please contact Daniel via @DanMcCathyFX on Twitter