AUD/JPY forecast: Will Aussie and yen continue to rise in 2023?

By Capital.com Research Team11:40 (UTC), 13 August 2024

Australian and Japanese currency tickers on their respective flags — The Japanese yen and Australian dollar are two of the world’s most traded currencies – Photo: iQoncept / Shutterstock

The Japanese yen (JPY) and the Australian dollar (AUD) are among the most heavily traded currencies in the world.

The pair has contrasting fundamentals. The yen is considered a safe-haven asset that many turn to in times of economic turmoil, while the Aussie is recognised as a commodity currency that gains favour during times of global expansion.

In 2022, the pair found common ground, with both currencies outperformed by the world’s reserve currency, the US dollar (USD). So how is the AUD/JPY currency pair expected to perform in the near term?

Let’s look at the key factors driving the JPY and AUD, and review analysts’ AUD/JPY forecasts for 2023 and beyond.

AUD/JPY Live Exchange Rate Chart

The Japanese yen and the Australian dollar (AUD/JPY) are among the top five most heavily traded currencies.

According to a triennial survey by the Bank for International Settlements (BIS), JPY was the third most-traded currency after the US dollar and the euro (EUR). The Australian dollar was the sixth most-traded currency in terms of global foreign exchange turnover.

The Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Markets is conducted every three years by the BIS.

2022 was a year of US dollar outperformance. The US dollar index (DXY) – which tracks the performance of the USD against a basket of major currencies – surged to its highest in over 20 years on the back of aggressive interest rate hikes from the US Federal Reserve (Fed).

On the other hand, the Japanese yen emerged as the biggest loser among the major currencies, with the USD/JPY rate surging to more than JPY151 – the highest level since 1990.

The Australian dollar also saw its value drop against the US dollar as the USD/AUD rate rose to an over two-year high of AUD1.62 in October 2022.

In terms of the AUD/JPY pair, the Aussie has fared better than the yen this year due to the sharp interest rate differential between Japan and the rest of the world’s major economies.

With the Bank of Japan (BoJ) firmly maintaining its ultra-loose monetary policy in the face of global monetary tightening, AUD/JPY has increased roughly 5.7% year-to-date from about 83 at the start of the year to 88.4 by 22 December 2022.

More recently, both the AUD and JPY gained ground against the USD as the market incorporated expectations of a slower pace of US Fed rate hikes.

USD saw its worst monthly performance against JPY in more than 24 years as USD/JPY rates fell by 7.1% in November 2022. Meanwhile, USD/AUD fell by 5.7% in November 2022 – its worst month since March 2016.

The AUD/JPY rate shed close to 6% of its value throughout November and December 2022, with Aussie extended its weakness against the JPY, falling to about 88 by 22 December 2022.

Major drivers for JPY and AUD: Interest rate differentials

The start of monetary tightening cycles in most economies has made interest rate differentials the major driver of foreign exchange rates in 2022.

An interest rate differential refers to the difference in interest rates between two or more economies. Typically, an increase in interest rates contributes to a higher foreign exchange rate for that nation’s currency.

“If Australian interest rates increase relative to interest rates in the US, Europe or Japan, Australian assets that pay interest (such as government bonds) become more attractive to foreign investors, as well as Australian investors that may invest overseas,” said the Reserve Bank of Australia (RBA).

Attractive interest rates contribute to more capital inflows, increase demand for the nation’s currency and stem the flow of money out of the nation.

The Fed has been aggressively hiking interest rates since March 2022 in a bid to control multi-decade-high inflation. It conducted its first rate hike since 2018 in March 2022, taking the rate from near-zero levels to a range of 0.25%-0.5%.

Since then, the Fed has carried out 50 bp hikes in May and December, in addition to four consecutive 75bps hikes in June, July, September and November, taking the rates to a range of 4.25% and 4.5%.

In contrast, Japan has maintained its negative interest rate of -0.1%, which has resulted in foreign exchange pressures for the export-focused nation.

Japan has welcomed a weak yen in order to benefit the country’s exports from corporations known for their automobiles, electronics and semiconductor manufacturing equipment. But there is a concern today, as the stark contrast in the interest rate policies of the US and Japan pushed the Japanese yen to its lowest level against the US dollar in more than 24 years.

“The key driver for the yen’s weakness in 1H22 was the divergence in monetary policy. Virtually all major central banks had pivoted to monetary tightening by 1H22, excluding the Bank of Japan,” said BofA Global Research in a note.

Japan widens yield target range in final BoJ meeting of 2022

In its final meeting in mid-December, the BoJ unexpectedly loosened its 10-year government bond yield target and committed to a review of its controversial yield-curve control policy.

The move triggered a leap in the yen, which had spent most of the year sliding because of Japan’s low yields, coupled with a bearish Japanese stock market and the global bonds sell-off.

The cap on 10-year Japanese government bond yields (JGB) allows the yields to move up to 50 basis points (bps) on either side of the 0% target, up from the original 25 bps. At a low of 0%, the 10-year JGB keeps borrowing costs low for both state and private businesses.

The move, however, arrived earlier than expected, as most market watchers were looking for a yield target adjustment closer to the end of 2023.

Tohru Sasaki, head of Japan market research at JPMorgan, said the bank’s move was borne out of concern about the effect that volatility in global markets was having on Japanese markets. Sasaki was cited by the Financial Times as saying:

“If a market malfunction is also an important reason for today’s move, a further move may follow because just a 25 [basis point] move cannot end or improve the malfunctioning.”

Jim Reid, head of global fundamental credit strategy at Deutsche Bank, added:

“It’s important not to underestimate the impact this could have, because tighter BoJ policy would remove one of the last global anchors that’s helped to keep borrowing costs at low levels, more broadly.”

The BoJ’s surprise move has fuelled expectations that Japanese investors could divest out of Australian debt to bring some funds back home.

RBA tightening not as aggressive as Fed

In Australia, the RBA’s delayed decision to join its international peers in the monetary tightening cycle has seen the USD gain more than 6% against the AUD.

In the first quarter of 2022, the RBA reiterated its stance of maintaining an accommodative monetary policy, despite seeing an acceleration in inflation rates.

By May, the Australian central bank pivoted from its dovish stance and hiked cash rates by 25bps to 0.35%. As of 22 December 2022, the RBA has taken cash rates to 2.85%.

However, the ultra-aggressive Fed rate hikes – described as the fastest rate hike cycle between 1988 and 2022 by the World Economic Forum – and capital flight to the safe haven of the US dollar have resulted in a clear outperformance by the USD against the AUD.

Catalysts for AUD/JPY: Exports, commodities and energy prices

International trade is an important driver of demand for currencies. A country exporting goods sees an increased demand for its currency to facilitate trade. With that in mind, it comes as no surprise that the JPY’s poor performance in 2022 has been exacerbated by Japan’s falling exports and rising trade deficit.

A global semiconductor shortage and Covid-related restrictions have adversely affected Japanese automobile production and exports since 2020. The zero-Covid policy in China, a key trade partner for Japan, has further dented export volumes for digital-related goods and semiconductor manufacturing equipment.

Japan has also recently seen its nominal trade deficit expand due to its dependence on food and energy imports. The start of the Russia-Ukraine war pushed oil prices above $100 per barrel for much of 2022 and hiked wheat prices to levels not seen since 2008.

In its Outlook for Economic Activity and Prices release published in July 2022, the BOJ said:

“Given that Japan is a commodity importer, a rise in these prices due to supply factors puts greater downward pressure on the economy through an increase in import costs, as this rise is not accompanied by an expansion in external demand or an increase in exports.”

Chris Turner, of economic think tank ING, said Japan’s negative trade deficit may have led many to question the yen’s safe-haven status.

“A safe-haven currency typically needs to be backed by a strong trade surplus – such that there is a natural demand for a currency in a crisis. The JPY has lost that backing from trade,” said Turner.

A conclusion to the Russia-Ukraine war, easing Covid-19 restrictions in China and an end to the global semiconductor crisis would be major catalysts for the Japanese economy and the JPY.

As for Australia, rising commodity and energy prices in 2022 were positives for the AUD – the country is a major exporter of liquified natural gas, iron ore, uranium and other minerals. However, concerns about global economic growth cut optimism over the Aussie economy going into 2023.

On 25 October 2022, the Australian government published a federal budget in which the government cut its long-term iron ore price assumptions from $91 per tonne to $55 per tonne, underscoring the weakening in demand for Australia’s largest export.

“Commodity prices are assumed to return to long-term fundamental price levels, causing a fall in the terms of trade in 2023–24. Elevated coal, iron ore, metals and other ore prices are assumed to unwind over two quarters, by the end of the March quarter of 2023, to levels consistent with long-term fundamentals,” read the budget.

The relaxation of China’s zero-Covid policy has boosted the demand outlook for commodities, but the effect is yet to be fully priced in across markets. According to the Australian government, China is Australia’s largest two-way trading partner in goods and services.

Daniela Hathorn, senior market analyst at Capital.com, recently outlined the potential effect of China’s reopening on the Aussie:

“The Australian dollar has lately benefitted from higher expectations for a Chinese economic reopening as a result of removing Covid restrictions, as well as hints of a slower pace of Fed rate rises in 2023. If these two trends continue, they may offer support for the Australian dollar, allowing it to retain a value over 0.70 compared to the US dollar and maybe approach the 0.75 zone in the second half of the year.

“If China’s reopening from Covid is effective, and US inflation slows as expected, causing the Fed to change its course, the second half of 2023 might be a strong positive period for the Australian dollar.

“The primary negative risks for the AUD are the strong link with risky assets like as equities markets, which may see some volatility in Q1, a return of Covid in China, and higher-than-expected inflation in the US, which will keep the Fed on a hawkish stance. In this scenario, the AUD might remain below 0.70.”

Outlook: AUD/JPY forecast for 2023 and beyond

AUD/JPY Exchange Rate Chart (2017-2022)

_{Past performance is not a reliable indicator of future results – Source: TradingView, IDC}

In its Australian dollar to Japanese yen forecast commentary, HSBC said risk-on currencies such as the AUD could underperform safe-haven currencies like the USD and JPY, due to the threat of a global recession and diminishing demand outlook for commodities.

“Perhaps, this is because the market focus is shifting to what this inflation battle will mean for global economic activity. With a slowing global economy and growing focus on recession risks, ‘risk-on’ currencies should generally underperform ‘safe haven’ currencies over the coming weeks and months, in our view,” commented HSBC.

We can also look at AUD/JPY futures contract data on foreign exchange derivatives marketplace CME Group to get an idea of the Australia dollar to Japanese yen forecast for 2023 and beyond.

CME data showed AUD/JPY March 2023 futures settled at 87.68 on 22 December 2022. The pair was trading at about 88 at the time of writing. Meanwhile, AUD/JPY June 2023 futures settled at 87.02, indicating a bearish AUD/JPY prediction for the first half of 2023.

Data firm TradingEconomics’ AUD/JPY forecast saw the pair trading at 91.023 by the end of December 2022 and at 89.829 in one year’s time.

Finally, the algorithm-based AUD/JPY forecast for 2023 from Wallet Investor suggested the exchange rate could open 2023 at the 89 mark. The pair was seen rising to an average of 96.114 by the end of 2023. The same site’s AUD/JPY forecast for 2025 predicted that AUD/JPY would close the year at 112.578. It did not give an AUD/JPY forecast for 2030.

Note that analysts’ and algorithm-based AUD/JPY forecasts can be wrong. Forecasts shouldn’t be used as a substitute for your own research.

Always conduct your own due diligence. Remember that your decision to trade or invest should depend on your risk tolerance, expertise in the market, portfolio size and goals. Never trade money that you cannot afford to lose.

FAQs

Why has AUD/JPY been rising?

AUD has outperformed the JPY in 2022 due to the interest rate differential between the ultra-loose monetary policy of the Bank of Japan and the monetary tightening pursued by the Reserve Bank of Australia.

Will AUD/JPY go up?

As of 22 December 2022, according to data firm TradingEconomics, AUD/JPY was expected to trade at 91.0233 by the end of December 2022 and at 89.8291 in one year’s time.

Always do your own research before investing, and remember never to invest more money than you can afford to lose.

When is the best time to trade AUD/JPY?

The best time to trade any asset is after conducting thorough research. Remember that your decision to trade or invest should depend on your risk tolerance, expertise in the market, portfolio size and goals. Never trade money that you cannot afford to lose.

Is AUD/JPY a buy, sell or hold?

Only you can decide whether AUD/JPY is a buy, sell or hold. Your investment decision should depend on your risk tolerance, expertise in the market, portfolio size and goals. Never trade money that you cannot afford to lose.