The AUD/JPY rose to around 108.85 during Asian trading on Tuesday after the Reserve Bank of Australia increased its Official Cash Rate by 25 basis points to 3.85%. This decision marks the first rate hike in over two years. The market anticipates more insights during the RBA press conference scheduled for later, which could further influence the Australian Dollar’s strength.
Japan faces political uncertainties with Prime Minister Sanae Takaichi calling for a snap general election on February 8. Contrary to Takaichi’s comments supporting a weaker yen, intervention fears from Japanese authorities could bolster the yen, counteracting the recent strength of the AUD against the JPY.
The Role of the Reserve Bank of Australia
The Reserve Bank of Australia’s primary role is to manage monetary policy, with interest rates as its main tool. The impact of inflation data can lead to interest rate changes, which affect the Australian Dollar’s value. Quantitative Easing (QE) and Quantitative Tightening (QT) are additional measures employed by the RBA, with QE typically weakening the Australian Dollar while QT strengthens it. Economic indicators such as GDP and employment data can also influence the AUD.
A year ago, in February 2025, we saw the AUD/JPY cross climb towards 109.00 after the Reserve Bank of Australia raised its rate to 3.85%. Today, with the RBA holding at 4.35% and the Bank of Japan having finally exited negative rates late last year, that dynamic has shifted. The pair is now trading closer to 105.50 as the yield advantage for the Aussie has diminished.
We see the RBA is likely on an extended pause, especially after the latest Q4 2025 inflation report showed a cooldown to an annual rate of 3.5%. This suggests a cap on the Aussie’s strength, limiting further upside for AUD/JPY. Derivative traders might consider selling out-of-the-money call options to collect premium, betting that the pair will not break significantly higher in the coming weeks.
Focus on the Bank of Japan’s Next Move
On the Yen side, the focus is squarely on the Bank of Japan’s next move after their historic policy shift in November 2025. With Tokyo’s January inflation data holding firm at 2.5%, speculation is growing about another small hike by mid-year. This potential for further policy tightening is likely to keep implied volatility elevated, making long volatility strategies on the pair worth considering.
The attractive carry trade that defined much of early 2025 has clearly lost its appeal due to this policy convergence. The risk for AUD/JPY in the near term seems skewed to the downside, driven more by potential BoJ action than any RBA surprises. Therefore, structuring trades that benefit from a falling spot price, such as buying put spreads to define risk, seems prudent for the weeks ahead.
