Japanese Yen and Aussie Dollar Forecast: BoJ Hawkish Bets and China Deflation Risks

Bank of Japan to Dismiss Political Upheaval, Driving Yen Demand

Political drama in Tokyo may dominate headlines, but traders are looking past the turmoil. Hawkish Bank of Japan signals are strengthening the yen and driving USD/JPY lower.

Outgoing PM Ishiba supported the Bank of Japan’s move toward monetary policy normalization. His successor could take a markedly different stance on monetary and fiscal policy, given uncertainties around tariffs and the global economic outlook.

A resilient Japanese economy and a pickup in inflationary pressures may shift the BoJ’s focus away from an October 4 leadership vote. Despite political uncertainty after PM Ishiba’s resignation, speculation about a BoJ rate hike has strengthened the yen, pushing USD/JPY briefly to a September 9 low of 146.306.

Why Do Traders Need to Look Beyond Politics for the Timing of a BoJ Rate Hike?

Wage growth and private consumption trends could fuel demand-driven inflation as Japan’s economy performs in line with expectations. August’s trade deal with the US may further boost US demand for Japanese goods, bolstering the economy through the fourth quarter. These factors may be enough to justify a 25-basis-point rate hike in October.

According to media reports on Tuesday, September 9, the BoJ sees the August trade deal removing risks to growth. Additionally, the Bank expects to see steady progress toward its price target. Bank of Japan Governor Kazuo Ueda previously signaled a willingness to lift rates if the economy and prices moved in line with the Bank’s projections.

Liberal Democratic Party lawmaker Taro Kono poured cold water on speculation about a delay to further policy tightening, stating:

“We need to fix the yen rate. In order to do that, the Bank of Japan needs to increase the interest rate. If the Bank of Japan delays a rate increase, I think it would mean inflation will continue, and everything we import would be higher.”

Traders should brace for increased USD/JPY volatility in the run-up to the October 4 vote. Policy rhetoric from the BoJ and leading contenders to head the LDP will influence sentiment.

USD/JPY Traders Eye Producer Prices, a Key Leading Inflation Indicator

On Wednesday, September 10, US producer prices could affect the Fed rate path and US dollar demand. Economists forecast producer prices to rise 3.3% year-on-year in August, mirroring July’s increase. A higher reading may signal a pickup in demand, fueling inflation. Rising inflation may cool expectations of policy easing in Q4, sending USD/JPY toward 150.

On the other hand, a softer print could support bets on multiple Fed rate cuts, pushing the pair toward 145.

USD/JPY Scenarios: Hawkish BoJ vs. Dovish Fed Risks

• Bearish USD/JPY Scenario: Hawkish BoJ signals, softer US producer prices, or dovish Fed rhetoric could push USD/JPY toward 145.
• Bullish USD/JPY Scenario: Dovish BoJ cues, rising US inflation, or hawkish Fed chatter could drive the pair toward 150.

Read the full USD/JPY forecast, including chart setups and trade ideas.

While Japanese politics and BoJ policy dominate yen markets, across the region the focus shifts to Australia, where the RBA faces its own challenges as China’s economy shows cracks. Together, these dynamics highlight the diverging policy paths affecting Asia-Pacific FX markets.

AUD/USD Braces for China Deflation Shock and RBA Fallout

Shifting focus to the AUD/USD pair, China’s August consumer and producer prices will be under the spotlight. Economists forecast consumer prices to fall 0.2% year-on-year in August after stalling in July. A return of deflationary pressures would signal a weakening demand backdrop, weighing on the Aussie dollar. Conversely, a surprise increase in consumer prices could lift appetite for the Aussie dollar.

While consumer price trends are crucial, producer prices will also be key.

Economists expect producer prices to fall 2.9% year-on-year after sliding 3.6% in July. A better-than-expected reading may signal a pickup in demand. Producers typically raise prices as demand improves, passing rising costs on to consumers.

As a leading inflation indicator, a less marked drop in producer prices may ease deflationary pressures in the months ahead. However, a larger-than-expected fall may fuel concerns about demand.

Impact of China Economic Indicators on AUD/USD Traders

China accounts for around one-third of Aussie exports. With a trade-to-GDP ratio above 50%, Australia remains highly sensitive to Chinese demand. Weaker demand may affect the labor market and consumer spending, supporting a more dovish RBA rate path. Conversely, stronger demand could point to a less dovish outlook.

RBA Governor Michele Bullock has previously highlighted the significance of China’s economy and policy measures. In July, Governor Bullock stated:

“Trade terms with China remain crucial. If China bolsters its economy with fiscal stimulus, that could cushion the impact of tariffs on Australia’s economy.”

AUD/USD: Key Scenarios to Watch

• Bearish AUD/USD Scenario: Weak Chinese data or dovish RBA rhetoric may push AUD/USD toward the $0.6550 level.
• Bullish AUD/USD Scenario: Strong China data or hawkish RBA signals could send AUD/USD toward the $0.6650 resistance level.

See our full AUD/USD analysis for detailed trends and trade setups.

Producer Prices to Drive AUD/USD Rate Differentials

While economists are betting on a Q4 RBA rate cut, traders expect a more dovish Fed rate path through the fourth quarter.

Softer producer prices could raise bets on Q4 Fed rate cuts. A more dovish Fed rate path would narrow the US-Aussie interest rate differential in favor of the Aussie dollar. Under this scenario, the AUD/USD pair may rise toward the $0.6650 level.

Conversely, a higher print may support a less dovish Fed policy stance. Reducing bets on policy easing in Q4 would widen the rate differential, pushing AUD/USD toward the $0.6550 level. If breached, the 50-day EMA would be the next key technical support level.

Key Market Drivers to Watch Today:

• USD/JPY: BoJ chatter, Japanese politics, and Japanese economic data.
• USD/JPY and AUD/USD: US producer prices.
• AUD/USD: Chinese price data and RBA forward guidance.

For more in-depth analysis, review today’s USD/JPY and AUD/USD trading setups in our latest reports and consult the economic calendar.