AUD/JPY is rising for the third consecutive day, mainly due to a weaker Japanese Yen (JPY). Several factors are driving the JPY down, including uncertainty about Bank of Japan (BoJ) policies, tensions between Japan and China, and discussions about elections in Japan. These issues, along with the Reserve Bank of Australia’s (RBA) hawkish approach, are helping the Australian Dollar (AUD). The AUD/JPY pair has reached the mid-106.00s, the highest point in over a year, thanks to ongoing demand for the currency. The outlook is bright, but concerns about potential intervention by Japan’s Finance Minister might limit further gains. There are reports that the authorities may try to control the JPY’s decline.

Geopolitical Tensions Affecting JPY

The relationship between Japan and China is strained, especially after China banned rare earth exports to Japan, which disrupts supply chains. This geopolitical friction adds downward pressure on the JPY. In contrast, the Nikkei 225 has reached record highs, which boosts the risk-sensitive AUD. Though conditions seem favorable for AUD/JPY, the market may be overbought on the daily chart, which could limit more increases. However, after breaking through the 105.50 resistance, any pullback may present a buying opportunity. The BoJ’s commitment to policy normalization might also discourage traders from taking new bearish positions on the JPY. We observe the AUD/JPY exchange rate moving into the mid-106.00s, a level not seen since mid-2024. This recent surge shows strong momentum, with the one-month implied volatility for the pair now at 12.5%, significantly up from last month’s 9.8%. Traders should view the move above 106.00 as a solid bullish sign.

Market Dynamics and Pricing

The weakness of the Japanese Yen is driven by several factors, especially political uncertainty concerning a potential snap election. The main issue, however, is the difference in interest rates between Japan and other countries, with the 10-year Japanese government bond yield at just 1.1%. This makes holding Yen less appealing, particularly since the Bank of Japan’s next policy meeting is not expected until January 28th. On the other hand, the Australian Dollar is showing significant strength. Inflation data from last quarter in 2025 was higher than expected at 3.8%. As a result, the market now predicts an 85% chance of another rate hike by the Reserve Bank of Australia in February. This expectation is providing strong support for the AUD. We should be cautious about the possibility of government action to support the Yen. In 2022, authorities intervened forcefully when USD/JPY surpassed the 150 level, and we are now hearing similar warnings. While the current AUD/JPY level might not prompt immediate action, a swift rise towards 108.00 could attract official attention. Given the strong upward trend but the risk of sudden intervention, taking a simple long position could be risky. A better strategy might be to use options, like buying a bull call spread. This tactic allows traders to participate in potential further gains while also limiting the maximum possible loss if Japanese authorities decide to step in. Create your live VT Markets account and start trading now.

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