This piece has been expert reviewed and fact checked by Forbes Advisor Australia Board Member, Tim Waterer, who has more than two decades of experience across FX, stocks, indices, and commodities. He is the chief market analyst at KCM Trade
The Australian dollar and the Japanese Yen (JPY) are the world’s sixth most-traded and the third-most traded currencies respectively, with each popular in the forex market for their distinct characteristics.
The Aussie dollar is widely considered a ‘risk-on’ currency thanks to the country’s high exposure to commodities exports to China and its sensitivity to global growth. On the other hand, the Yen is seen as a ‘safe’ currency to which traders flock during times of market volatility.
The AUD/JPY pair is often perceived as a good indicator of risk sentiment in financial markets, since it moves higher during periods of optimism and declines when risk sentiment is low.
The combination sank to its lowest level in March last year, soon after US banking troubles hit the headlines. The wave of risk aversion that followed saw the Yen prosper.
However, since then the AUD has made up ground against its Japanese counterpart, on market expectations that interest rate increases by major western central banks have mostly peaked.
The Australian Dollar’s Performance Over the Past Year
The Australian dollar’s performance is determined by a number of factors, but the key this year has been the potential for interest rate cuts both domestically and globally.
The AUD has underperformed against most of its developed world peers over the last 12 months as The Reserve Bank of Australia has lifted rates at a slower pace than other central banks, raising the differential in interest rates. By February of this year, it was already down more than 4% against the USD.
The AUD bottomed out against the US dollar in October 2023 when fears peaked that the US Federal Reserve would continue with its monetary tightening campaign, hitting risk sentiment.
Since then, however, global equities and other risk-assets have staged a sharp recovery, which has allowed the AUD to claw back some ground. As of July, 2024, one Australian dollar is buying 68 US cents.
How Has the Yen Been Performing?
The Yen witnessed a sharp rally in March 2023 but has still been an under-performer against major currencies over the last 18 months. The main factors have been the growing disparity in interest rates with other major economies, and the Bank of Japan’s (BOJ) dovish policy.
The March 2023 sell-off in risk assets saw JPY strengthen across the board as the currency benefitted from safe-haven inflows. However, the rebound in risk assets since the last quarter of 2023 has seen yen demand on the wane, with traders seeking currencies which return a higher yield.
“The Yen has faced a tumultuous period, reaching fresh year-to-date lows and causing unease among financial circles. The currency’s stability has come into question after a significant sell-off, propelling USD/JPY to a new high,” says Luca Santos, currency analyst at ACY Securities.
The Bank of Japan ended the world’s last negative rate regime in March this year, voting to raise rates from –0.1% to a zero to 0.1% range. It was the first time in 17 years that Japan’s central bank has raised rates and was seen as a token effort at monetary tightening.
BOJ Governor Kazuo Ueda said earlier this month that financial conditions in Japan will continue to remain accommodative even when the bank ends negative rates.
The Japanese currency fell past 154 per dollar in the wake of the ‘tightening’—its weakest level in 34 years.
The decision to keep rates low has meant the BOJ is at odds with its global central banking peers, who have been focused on pushing up borrowing costs in an effort to weaken inflation.
Over the last two years, the US Federal Reserve has lifted rates by 5.25% while the European Central Bank has boosted rates by 4.5%.
AUD To JPY Exchange Rate
At the beginning of this year, one Australian dollar was equal to 97.76 Japanese Yen. By July, it could buy 107.63 yen.
Despite regular bouts of risk aversion over the last 18 months that have supported demand for the safe-haven JPY, the local currency is up significantly against its Japanese counterpart over that period.
Forex brokers say the Aussie dollar is stronger against the yen than against other currencies because of the greater interest rate differential. While the RBA cash rate currently stands at 4.35%, the BOJ rate is zero to .1%. That means traders looking for yield see an advantage in being long on the Aussie dollar while shorting the Yen.
Over the last 18 months, the AUD/JPY rate hit its lowest level (near 86.50) in March 2023 when problems in the global banking sector surfaced. It peaked in July this year at its current level.
Australian Dollar To Japanese Yen: Six-Month Forecast
With the Japanese Yen sustaining losses in recent months against most major currencies, the currency has fallen the most among the G10 and forex strategists believe the weakness is probably overdone.
Jonathan Petersen, a senior economist at Capital Economics, has outlined three key factors that indicate further depreciation in the yen could be limited.
He says policymakers at Japan’s Ministry of Finance have already signalled their concern about the latest fall in the yen and could intervene to prevent further weakness. In addition, short-term technical indicators suggest speculative pressure against the yen is abating. Finally, the renewed weakness has left the yen substantially undervalued on the basis of its Real Effective Exchange Rate (REER) index.
“The rise in US bond yields has put renewed pressure on the yen, but we think further downside is limited. We still expect Treasury yields to resume their downward trend and for the yen to benefit most among G10 currencies vis-à-vis the (US) dollar from this tailwind,” he said in a note earlier this year.
Bloomberg reported at the time that traders have piled into hedges against further declines in the Japanese currency amid potential intervention by authorities in Tokyo, with open interest for near-dated yen futures contracts hitting a six-year high in February.
AUD to JPY Long-Term Forecast
Over the longer term, the timing and depth of the US Federal Reserve’s expected interest rate cuts later this year are likely to be factors that would halt the current AUD-JPY momentum. A slower and more measured rate cut cycle by the Fed could alleviate downside risks for AUD/JPY in the foreseeable future.
Another critical determinant will be the contrasting monetary policy trajectories pursued by the RBA and the BOJ. While the RBA’s proactive response since the global pandemic has signalled an optimistic outlook for Australia’s economic resilience, the BoJ’s more restrained approach has emphasised a prolonged monitoring stance with an inclination towards additional easing measures.
Most currency strategists expect the Japanese currency to rebound by the end of the year, driven by a narrowing interest-rate differential and a slowing global economy. A recession scenario for major economies would also hurt risk sentiment and see the safe-haven JPY prosper at the expense of currencies such as the AUD.
Despite the recent weakness in its economy, the BOJ is widely expected to continue to lift Japanese interest rates in a slow and steady process.
“The potential shift in the BoJ’s policy stance, particularly a departure from negative interest rates, adds an additional layer of complexity to the longer-term outlook,” ACY’s Santos said.
“The increased demand for JPY, coupled with evolving global economic conditions and potential adjustments in interest rate differentials, may alter the trajectory of the AUD-JPY pair beyond the 12-month horizon.”
