The Japanese Yen (JPY) softened against the Australian Dollar (AUD), with the AUD/JPY cross attracting buyers to around 110.90 during the early European session on Friday, as traders reacted to signals from the Bank of Japan (BoJ) regarding its interest rate path [1]. BoJ Governor Kazuo Ueda indicated a likely 'prolonged hold' on interest rates due to economic uncertainty stemming from the Middle East war, despite a long-term commitment to rate normalization [1]. Meanwhile, Japan’s Finance Minister Satsuki Katayama stated that the government is ready to take steps in a timely fashion to combat the economic impact from the Iran conflict, including the possibility of compiling an extra budget, as previously mentioned by the Prime Minister [1][2]. Katayama also noted that Japan is not fully exited from deflation [1][2].
BoJ Deputy Governor Himino commented that the central bank is keeping monetary conditions accommodative and will gradually adjust the degree of monetary accommodation [2]. Himino added that underlying inflation is gradually accelerating toward the BoJ's 2% target and that the BoJ will continue to scrutinize market moves and their impact on the economy and prices [2].
Market reactions were evident, with the USD/JPY pair up 0.16% on the day at 157.80 at the time of press [2]. Traders have priced in nearly a 5% chance that the Japanese central bank will raise borrowing costs from 0.75% this month, with the probability rising to about 65% if the April meeting is included, according to Bloomberg [1].
On the Australian side, a narrower-than-expected trade surplus might cap the upside for the AUD in the near term. Australia’s Trade Surplus shrank to 2,631M MoM in January, below the market consensus of 3,900M and following December’s surplus of 3,373M, as reported by the Australian Bureau of Statistics [1].
CONCLUSION
The Bank of Japan's signals of a prolonged rate hold and continued accommodative policy, combined with government readiness to address economic risks from the Iran conflict, have led to a softer Yen and moderate market reactions. The AUD/JPY and USD/JPY pairs both saw gains, while Australia's trade surplus data may limit further AUD strength. Overall, the market is responding cautiously to ongoing uncertainty and policy signals.