Australian Dollar edges higher vs Yen as RBA hike bets meet BoJ shift

AUD/JPY advances on Friday and trades around 112.65 at the time of writing, up 0.39% on the day. The Australian Dollar (AUD) benefits from growing expectations of higher interest rates in Australia, although the prospect of tighter monetary policy in Japan also supports the Japanese Yen (JPY) and could limit the cross’ upside.

Expectations surrounding the Bank of Japan (BoJ) are shifting toward a more hawkish stance following recent comments from board member Hajime Takata. Takata said the central bank should raise interest rates more flexibly to address intensifying inflationary pressures rather than follow a predetermined semiannual pace.

These remarks fuel speculation that the BoJ could adopt a more hawkish tone than previously expected at its September 17-18 meeting. Masahiko Loo, senior fixed income strategist at State Street Investment Management, said the Japanese Yen’s recent move looks less like a position adjustment and more like a cautious market reassessment of a more hawkish BoJ path. According to Loo, investors are beginning to price in the possibility that Japan’s monetary policy normalization could continue into 2027.

However, the Japanese Yen continues to face headwinds from concerns over Japan’s public finances. Japan’s initial general-account budget requests are estimated at around ¥143 trillion, a record high for a fourth consecutive year. Doubts over Prime Minister Sanae Takaichi’s ability to balance fiscal discipline with her ambitious investment strategy therefore offset some of the support the Japanese currency receives from expectations of higher interest rates.

On the Australian side, the monetary policy outlook also supports the currency. The Australian Bureau of Statistics (ABS) reported on Wednesday that the Australian economy expanded by 0.4% QoQ in the second quarter, slightly above expectations. The resilience of economic activity strengthens expectations that the Reserve Bank of Australia (RBA) could resume its monetary tightening cycle.

Markets have therefore raised their expectations of an RBA rate hike as early as September. The growth figures reinforce the view that the Australian economy remains resilient enough to allow the central bank to continue tackling inflationary pressures.

According to strategists at Brown Brothers Harriman, the latest GDP release prompted a notable repricing in RBA expectations, with “RBA cash rate futures” showing that “odds of a 25bps hike on September 29 jumped from 55% to nearly 80%, while markets moved closer to pricing 50bps of tightening over the next twelve months.” BBH adds that, beyond the shifting policy outlook, “Australia’s attractive carry alongside the country’s strategic exposure to commodities linked to energy, AI, and defense remain key AUD tailwinds.”

AUD/JPY is therefore caught between two similar monetary policy forces on Friday. Growing expectations of further RBA tightening support the Australian Dollar and allow the cross to advance toward 112.65, while the prospect of faster BoJ normalization could limit the extent of the upside.