The Australian dollar has once again outperformed most major currencies, reaching a multi-decade high against the Japanese yen, according to National Australia Bank. This movement occurred following the Japanese Prime Minister Sanae Takaichi’s government’s nomination of two new Bank of Japan policy board members who are perceived as dovish regarding monetary policy, as reported by Bloomberg.
The yield on Japan’s 40- and 30-year government bonds increased by approximately 10 basis points. Simultaneously, the Japanese currency reached a new two-week low against the US dollar, trading at 156.60. Money markets are currently pricing in 50 basis points of interest rate increases by the Bank of Japan this year. This is a slight decrease from the 58 basis points that were priced in before the nominations were announced.
Despite the yen’s recent weakness, Jonas Goltermann of Capital Economics anticipates a rebound. Goltermann suggests that the risk of further volatility in Japanese markets remains a possibility, with potential for higher Japanese government bond yields, a weaker yen, and rising Japanese equities. However, he believes there are reasons to expect stabilisation in JGB yields and a subsequent rebound of the yen in the coming months.
Goltermann also notes that the Japanese government’s influence over the Bank of Japan is often overstated. Additionally, he points out that the USD/JPY exchange rate is approaching the 160 level, around which Japanese authorities intervened in 2024. He expects market participants will be hesitant to test this level again, contributing to a potential yen recovery.
