AUD/JPY gains as BoJ puts an end to negative rates

The AUD/JPY currency pair registered modest gains on Tuesday in the wake of central bank policy decisions in Japan and Australia.

The Bank of Japan put an end to an eight-year period of negative interest rates. The BoJ raised its short-term interest rate to 0%-0.1% from -0.1% at its March meeting, in line with market expectations.

It has been the first BoJ rate hike since 2007, as Japanese inflation had surpassed the central bank’s 2% objective and the largest companies in the country had agreed on a 5.28% wage raise – the largest increase in more than three decades.

The BoJ discontinued yield curve control for 10-year government bonds and also dropped the purchases of ETF and Japan real estate investment trusts.

The central bank noted it would continue buying “broadly the same amount” of government bonds as previously and bolster purchases if long-term yields rise quickly.

“The BoJ took its first, tentative step towards policy normalization. The big question is what happens next,” Frederic Neumann, chief Asia economist at HSBC, was quoted as saying by Reuters.

“Likely, the BoJ will find that it is getting ‘stuck at zero’, being unable to lift short-term interest rates meaningfully further in the coming quarters.”

Market players will now be on watch if more BoJ policy tightening lies ahead, since it could affect the Yen’s role as a funding currency for carry trades.

Meanwhile, the Reserve Bank of Australia kept its cash rate unchanged at a 12-year high of 4.35% at its March meeting, as largely expected.

The RBA Board said it needed to be certain that inflation was moving towards the 2%-3% target range in 2025 and to the midpoint of that range in 2026.

Still, the central bank watered down its tightening bias.

“The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out,” the RBA said in a statement.

Previously, it had said that “a further increase in interest rates cannot be ruled out.”

Currency Pair Performance

As of 9:14 GMT on Tuesday the AUD/JPY currency pair was edging up 0.10% to trade at 97.931.