AUD/JPY fell to about 114.50 in early Asian trade on Wednesday, with the Australian Dollar weakening against the Japanese Yen after Australia’s inflation release. Markets are also watching Japan’s Tokyo CPI data due on Friday.
Australia’s CPI rose to 4.6% year on year in March, up from 3.7% in February, and was linked to higher fuel costs tied to the Middle East conflict. The result was below the 4.7% forecast, while monthly CPI increased 1.1% in March after 0% previously.
Australian Inflation Weighs On The Aud
The lower-than-expected CPI added near-term pressure on the AUD. Expectations for a Reserve Bank of Australia rate rise in May remain in place, supported by a tight labour market and firmer growth in late 2025.
In Japan, the Bank of Japan kept its short-term interest rate unchanged at 0.75% after its two-day meeting on Tuesday. The BoJ said it will raise rates based on developments in the economy, prices, and financial markets, and noted that wages and prices may rise more than the output gap implies.
The central bank said it will assess the timing and pace of policy changes while monitoring the economic and price effects of Middle East war developments.
Looking back to this time in 2025, we saw Australian inflation at 4.6% and the Bank of Japan’s rate at 0.75%, with AUD/JPY near 114.50. This setup created expectations for a rate hike from the Reserve Bank of Australia, which it delivered in mid-2025. The economic landscape has shifted significantly over the past year.
Monetary Policy Divergence Drives The Cross
The RBA’s hikes through 2025 have successfully cooled the economy, with the latest Q1 2026 CPI data released last week showing inflation has fallen to 3.1%. As a result, market pricing now implies a greater than 70% chance of an RBA rate cut by the third quarter of this year. This policy pivot is putting sustained downward pressure on the Australian dollar.
Conversely, Japan’s situation has evolved as the Bank of Japan had signaled. Following the strongest “Shunto” spring wage negotiations in 30 years, which secured an average 4.5% pay increase, the BoJ has hiked its policy rate twice to its current 1.25%. This monetary policy divergence between a dovish RBA and a hawkish BoJ has pushed the AUD/JPY cross down to the 108.20 level we see today.
For derivatives traders, this clear divergence suggests positioning for further downside in AUD/JPY. Buying put options with a three-month expiry and a strike price around 107.00 could be an effective strategy to capitalize on this trend while capping potential losses. We have seen one-month implied volatility on the pair rise from 9% to 12.5% recently, indicating the market is bracing for bigger moves.
In the coming weeks, we must watch for any forward guidance from the RBA that suggests a faster cutting cycle. Additionally, the Bank of Japan’s upcoming Tankan survey will be critical for gauging business sentiment in the face of higher rates. Any surprisingly weak data from Australia or strong data from Japan would serve as a catalyst to add to bearish positions.
