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, 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 more than a year in March, soon after the first signs of US banking troubles hit the headlines. The wave of risk aversion that followed saw the Yen prosper.
Since then, the AUD has managed to make up some ground against its Japanese counterpart, but the progress has been gradual.
The Australian Dollar’s Performance in 2023
The Australian dollar’s performance is determined by a number of factors, with the key ones this year being rising interest rates and the weakening outlook for the global economy.
The AUD has underperformed against most of its developed world peers 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 down nearly 2% against the USD so far this year.
Rising investor concerns about the risk to global growth have also had an impact on the local currency. The AUD bottomed out in March when the impact of the steep central bank hikes came to the forefront in the form of banking sector woes in the US and Europe, hitting risk sentiment.
Since then, however, global equities and other risk-assets have staged a recovery which has allowed the AUD to claw back some ground. “Notwithstanding the RBA pause in April, the Australian central bank has remained firmly in inflation-fighting mode with regards to interest rates, and this has boosted the yield outlook of the AUD compared to other currencies and in particular, against the low-yielding Yen,” explained Tim Waterer, chief market analyst at forex broker KCM Trade.
How Has The Yen Been Performing?
The Yen has been an underperformer against major currencies this year, despite witnessing a rally in March. The main factors have been the growing disparity in interest rates with other major economies, and the Bank of Japan’s (BOJ) continuing 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 then has seen yen demand on the wane, with traders seeking currencies which return a higher yield.
Related: Best ‘Safe Haven’ Investments for Australians
“The BOJ has maintained a dovish outlook for its monetary policy and this is capping any near-term expectations for an improvement in Japanese interest rates,” Waterer says.
At its last meeting at the end of April, the central bank maintained its rock-bottom interest rate of -0.1% and continued its asset purchase program.
As a result, the Japanese currency fell to a two-month low against the US dollar, while it tumbled to the lowest level since 2008 against the Euro.
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 year, the US Federal Reserve has lifted rates by 5% while the European Central Bank has boosted rates by 3.5%.
AUD to JPY Exchange Rate
At the time of writing, one Australian dollar is equal to 90.10 Japanese Yen.
Despite regular bouts of risk aversion in the last few months that have boosted demand for the safe haven JPY, the local currency is up nearly 1% against its Japanese counterpart.
Forex brokers say the Aussie is stronger against the Yen than against other currencies because of the greater interest rate differential. While the RBA cash rate currently stands at 3.85%, 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 highest level so far this year (around 93) in February before sinking to its lows of the year (near 86.50) in March when problems in the global banking sector surfaced.
Australian Dollar to Japanese Yen: Six-Month Forecast
With the Japanese Yen sustaining losses in recent weeks against most major currencies, forex strategists see scope for an improvement in the AUD-JPY rate to 93 in the short term.
While the BOJ have highlighted high inflation in Japan as a concern, indications are that newly appointed Governor Ueda will follow the same ultra loose monetary policy as his predecessor for the immediate future.
Analysts at JP Morgan have reiterated that JPY will remain under pressure because fundamentals are weak on an historic basis.
“This reflects the historical weakness in JPY’s fundamentals, deteriorating balance of payment, and the significantly wide short-term yield gap between other major countries,” JP Morgan research analysts Joyce Chang, Amy Ho and Tohru Sasaki said in a statement earlier in May.
By contrast, Australian macro data has continued to show resilience and could prompt the RBA to maintain its aggressive stance on interest rates. With the RBA cash rate likely to peak over 4%, the yield differential that the Aussie dollar enjoys looks set to widen.
AUD to JPY Long-Term Forecast
Over the longer term, a pause in the US Federal Reserve’s aggressive tightening campaign and the prospect of a US recession later this year are likely to be factors that would halt the current AUD-JPY momentum.
Some global banks such as UBS and Credit Agricole CIB expect the Japanese currency to rebound by the end of the year, driven by a narrowing interest-rate differential as well as concerns over the US banking sector. A US recession would also hurt risk sentiment and see the safe-haven JPY prosper at the expense of currencies such as the AUD.
Waterer says while it is not strictly true that the only way for Japanese interest rates is to go up, it is fair to expect that as the most likely scenario for the BOJ. However, rate hikes are likely to be a slow and steady process when it happens.
“It may not happen until 2024, but we could see conditions where the BOJ are tightening policy while the RBA are either stationary on rates or even loosening policy, and that would put downward pressure on the AUDJPY rate,” he said.
Longer term, he expects the pair to settle back between the 81.00-84.00 range.
