Japanese Yen and Aussie Dollar Forecasts: Japan Inflation Cools as BoJ Decision Looms

Inflation Cools Ahead of BoJ Monetary Policy Decision

Traders are bracing for a pivotal Bank of Japan decision today after softer inflation data cast fresh doubt on the policy outlook — with USD/JPY at risk of sharp swings.

The annual inflation rate dropped from 3.1% in July to 2.7% in August, while the so-called ‘core-core’ inflation rate fell to 3.3% (July: 3.4%). Softer inflation trends may delay further tightening, allowing policymakers time to assess wage growth and household spending trends. Wage growth has accelerated this year. However, if the upswing in wages doesn’t translate into consumption, inflation may cool further.

Monetary Policy Expectations

August’s data came ahead of the highly anticipated Bank of Japan monetary policy decision this morning. According to the latest Bloomberg BoJ Watchers survey, 88% of economists expect the BoJ to maintain interest rates at 0.5% today.

Unless there is a surprise policy adjustment, traders should consider the Outlook Report and BoJ Governor Kazuo Ueda’s forward guidance. What should traders look out for?

Skeveral key considerations that could affect demand for the yen, including:

• Views on the effect of US tariffs on external demand, the broader economy, and the labor market.
• Outlook on prices and the economy.
• Concerns, if any, about the upcoming October 4 election for a new Liberal Democratic Party leader.

The yen could face selling pressure if the BoJ believes the latest US-Japan agreement could erode demand for Japanese goods. A softer price outlook, a slowing economy, and the need to consider the election before pivoting toward a rate hike, would also weigh on the yen.

On the other hand, the yen could rally if the BoJ sees prices and the economy moving in line with projections and dismisses any impact of the elections on the Bank’s policy stance.

Fed Speakers in Focus: Market Impact on USD/JPY

Later Friday, traders should monitor FOMC members’ speeches for insights into the potential timing of an interest rate cut.

Support for an October rate cut to bolster the labor market could signal back-to-back rate cuts in the fourth quarter. A dovish policy outlook may push USD/JPY toward the September 17 low of 145.481.

Conversely, calls to delay further policy easing until December may drive the pair toward the 149.358 resistance level.

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

• Bearish USD/JPY Scenario: Hawkish BoJ or dovish Fed rhetoric could push USD/JPY toward 145.
• Bullish USD/JPY Scenario: Dovish BoJ cues or hawkish Fed rhetoric could send the pair toward 149.358.

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

The yen isn’t the only currency in focus. Shifting policy signals from the Fed and ongoing US-China trade talks are also influencing demand for the Aussie dollar, making AUD/USD the next key pair to watch.

US-China Trade Talks and Aussie Exposure

Shifting focus to the AUD/USD pair, US-China trade talks will influence demand for the Aussie dollar. US President Trump and Chinese President Xi Jinping will speak on Friday, September 19.

Why do US-China trade developments matter for AUD/USD traders?

Australia has a trade-to-GDP ratio of over 50%, potentially exposing the economy and the Aussie dollar to shifts in trade terms. Given that China accounts for roughly one-third of Aussie exports, reduced tariffs on China could boost external demand for Chinese goods, leading to stronger Aussie exports to China. However, stalled talks and an escalation in the US-China trade war may weaken external demand for Chinese goods, pressuring Aussie trade terms with China.

RBA Governor Michele Bullock previously commented on the influence of tariffs, demand from China, and the potential effect on RBA policy, stating:

“Australia’s economy could easily be compromised if a trade war between the US and China escalates. Depending on where we end up on trade developments, there might be more interest rate adjustments.”

Trade developments could potentially skew the RBA’s outlook on the economy and interest rates.

Progress toward a trade agreement, including lowering US tariffs on Chinese shipments, could lift sentiment. Conversely, stalled talks may fuel speculation about multiple RBA rate cuts, affecting investor appetite for the Aussie dollar.

AUD/USD: Key Scenarios to Watch

• Bearish AUD/USD Scenario: An escalation in the US-China trade war or dovish RBA rhetoric may drag AUD/USD below $0.66.
• Bullish AUD/USD Scenario: Progress toward a US-China trade deal or hawkish RBA chatter could send AUD/USD toward $0.67.

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

Fed Policy and Rate Differentials

While economists expect a November RBA rate cut, traders had bet on aggressive Fed rate cuts, sending AUD/USD briefly to $0.67071 on Wednesday, September 17.

Dovish Fed speakers may fuel speculation about multiple rate cuts in fourth quarter. This could narrow the US-Australia rate differential in favor of the Aussie dollar. A narrower rate differential may send AUD/USD toward $0.67.

Conversely, calls to delay further rate cuts to tackle sticky inflation may widen the rate differential in favor of the US dollar. A less dovish Fed rate path may push AUD/USD toward $0.66. If breached, $0.6650 would be the next key support level.

Key Market Drivers to Watch Today:

• USD/JPY: BoJ forward guidance and Japanese politics.
• USD/JPY and AUD/USD: Fed speakers.
• AUD/USD: US-China trade talks and RBA policy signals.

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