The Australian dollar and the Japanese Yen (JPY) are the world’s sixth most-traded and the third-most traded currencies respectively, with each being 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.
Over the last 12 months, the combination sank to its lowest level in March 2023, soon after the first signs of 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 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. It is already down more than 4% against the USD so far in 2024.
Over the last year, 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. It has weakened again in recent weeks amid a concerted push back by major central banks against market speculation about early rate cuts.
How Has The Yen Been Performing?
The Yen witnessed a sharp rally in March 2023 but has still been an underperformer against major currencies over the last year. 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 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 for the year,” says Luca Santos, currency analyst at ACY Securities.
While the Bank of Japan has been widely expected to end the world’s last negative rate regime this year, the central bank’s efforts to end its rock-bottom interest rate of -0.1% received a setback after Japan’s economy unexpectedly slipped into recession after shrinking for a second quarter amid softening domestic demand.
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. However, the weaker-than-expected economic result will complicate the BOJ’s case to conduct the first rate hike in Japan since 2007, a step most economists had predicted would take place by April.
The Japanese currency fell beyond 150 against the US dollar in February, a level last seen in 1990.
The decision to keep the stimulus in place in pursuit of stronger inflation has meant the BOJ is at odds with its global central banking peers, who are 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 time of writing, one Australian dollar is equal to 97.76 Japanese Yen.
Despite regular bouts of risk aversion over the last 12 months that have supported demand for the safe-haven JPY, the local currency is up nearly 6.2% 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 -0.1%. That means traders looking for yield see an advantage in being long on the Aussie dollar while shorting the Yen.
The AUD/JPY rate hit its lowest level (near 86.50) over the last year in March 2023 when problems in the global banking sector surfaced. It peaked in November (around 98.50) before settling around the current level.
Australian Dollar to Japanese Yen: Six-Month Forecast
With the AUD-JPY pair already hovering near its highest level since 2015 (hit in November), there could be limited scope for an improvement in the rate in the near term.
With the Japanese Yen sustaining losses in recent weeks 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 this week.
Indeed, Bloomberg reported on Thursday 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.
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 lift Japanese interest rates, although rate hikes are likely to be a slow and steady process when it happens.
“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,” he added.
