AUD/JPY rises to near 97.20 after dovish remarks from the BoJ Governor Kazuo Ueda

• AUD/JPY gains ground as market sentiment turned bearish on dovish BoJ’s remarks.
• Bank of Japan (BoJ) Governor Kazuo Ueda stated that accommodative conditions are expected to continue even if negative rates are abandoned.
• IMF suggests that Japan should adopt tighter fiscal policy measures and gradually phase out monetary stimulus initiatives.
• The intraday recovery in the Australian money market supports the AUD.

AUD/JPY moves on an upward trajectory for the fourth consecutive session, edging higher to near 97.20 during the European hours on Friday. The sentiment of the JPY’s traders shifted to bearish following the dovish remarks from Bank of Japan (BoJ) Deputy Governor Uchida Shinichi on Thursday. He stated that the central bank would not pursue aggressive rate hikes upon ending negative rates.

Moreover, BoJ Governor Kazuo Ueda commented on Friday, expressing that accommodative conditions are likely to persist even if negative rates are abandoned. He emphasized the importance of monitoring the health of the BoJ balance sheet as the exit from stimulus policy approaches.

The International Monetary Fund (IMF) released its findings following its annual policy consultation with Japan and the Bank of Japan. The report indicates that upside risks to inflation have materialized over the past year. It recommends that Japan should tighten fiscal policy and gradually wind down monetary stimulus measures.

First Deputy Managing Director of the International Monetary Fund, Gita Gopinath, elaborated further, stating that if the BoJ proceeds gradually with clear communication, increases in short-term rates should not result in significant global spillovers. Gopinath also suggests that the BoJ can smoothly transit away from negative rates, given the market's perception that real borrowing costs will remain very low.

The AUD/JPY cross encountered challenges as the S&P/ASX 200 index trended negatively during the early trading hours of Friday, accompanied by declines in coal and iron ore prices. However, the Australian money market managed to recover intraday losses and shift into positive territory, potentially providing support for the Australian Dollar (AUD). This positive momentum for the AUD may act as a tailwind for the AUD/JPY cross.

Reserve Bank of Australia (RBA) Governor Michele Bullock addressed parliament, noting that recent inflation developments are encouraging, but there is still progress needed to meet the target. Bullock also mentioned that if consumption slows faster than anticipated, there would be an opportunity to consider rate cuts. Furthermore, the Commonwealth Bank of Australia (CBA) predicted a reduction of 75 basis points in the benchmark interest rate for 2024, with the first cut expected in September.