Japanese Yen and Aussie Dollar Forecasts: USD/JPY Volatility Rises on BoJ and Election Risks

Elections Put BoJ Policy in the Spotlight as Yen Traders Brace for Volatility

Japan’s October 4 election has become more than a political showdown — it’s a turning point for yen markets. Prime Minister Shigeru Ishiba’s sudden resignation has unsettled investors, forcing traders to recalibrate the Bank of Japan rate path. The uncertainty has already jolted USD/JPY volatility, underscoring how politics and monetary policy is driving near-term yen volatility.

According to the latest Bloomberg survey, around 88% of economists forecast a 25-basis-point rate hike by January 2026. While consensus points to a hike by early 2026, most favor an October move. However, Prime Minister Shigeru Ishiba’s resignation has lowered the probability of an October hike, with estimates falling from 42% to 36%.

Industrial Production Spotlights the Japanese Economy

Upcoming economic indicators could shift sentiment, with the BoJ standing by its previous commitment to lift rates if the economy and prices move in line with projections.

On Friday, September 12, industrial production figures will provide insights into the demand environment. According to the preliminary report, production slid 1.6% month-on-month in July after June’s 2.1% increase.

A sharper fall in production could support a less hawkish BoJ policy stance, weighing on the yen. Conversely, a positive reading may support monetary policy tightening in the fourth quarter.

Why industrial production matters to traders:

Production trends typically affect the labor market, wage growth, and consumer spending. A tighter labor market could lift wages and consumer spending, fueling demand-driven inflation. On the other hand, falling production may lead to job cuts and softer wage growth.

Beyond the data, the outcome of the October 4 election could be pivotal, spotlighting potential candidates.

Traders should brace for increased USD/JPY volatility as potential Liberal Democratic Party candidates present their policy stance.

USD/JPY Traders Shift Focus to Consumer Sentiment as the CPI Report Dust Settles

Later Friday, consumer sentiment will influence the Fed’s policy stance and appetite for the US dollar. Economists forecast the Michigan Consumer Sentiment Index to fall slightly from 58.2 in August to 58 in September.

A larger-than-expected drop in sentiment could indicate a pullback in consumer spending, dampening inflation. Additionally, weaker spending could cool the US economy, given that private consumption accounts for around 67% of the US GDP. A softer inflation and slower economic outlook could boost bets on multiple Fed rate cuts, sending USD/JPY toward 145.

Conversely, stronger sentiment and an improving economic backdrop may reduce bets on multiple rate cuts in the final quarter. A less dovish Fed policy stance may send USD/JPY toward 150.

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

• Bearish USD/JPY Scenario: Hawkish BoJ signals, strong Japanese data, weaker US consumer sentiment, or dovish Fed signals. These scenarios could push USD/JPY toward 145.
• Bullish USD/JPY Scenario: Dovish BoJ rhetoric, weaker Japanese data, or hawkish Fed cues could drive the pair toward 150.

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

While Japanese politics and BoJ policy continue driving yen markets, across the region, the focus shifts to Australia. Economic data continues to influence the RBA rate path. Together, these dynamics highlight the diverging policy paths affecting Asia-Pacific FX markets.

AUD/USD Outlook Hinges on November Rate Cut Odds

Shifting focus to the AUD/USD pair, economists expect the RBA to cut interest rates in November, February, and May, which would lower the cash rate from 3.35% after November’s move to 2.85% by May.

Notably, AMP Chief Economist and Head of Investment Strategy Shane Oliver continues to price in a November cut despite recent data indicating a pickup in economic momentum. Oliver noted that the RBA raised interest rates 13 times before pivoting and has only cut rates by 75 basis points in the current policy easing cycle.

An elevated rate environment and sub-trend real wage growth expose the Aussie economy to downside risks. Concerns of a pullback in spending continue to support expectations of multiple RBA cuts to bolster growth. Meanwhile, markets are also raising expectations of a 50-basis-point Fed rate cut in September and the potential for more cuts in Q4.

Policy divergence signals a narrowing interest rate differential in favor of the Aussie dollar. Upcoming labor market data could delay further RBA rate cuts if participation rises and unemployment unexpectedly falls. Conversely, weaker labor market data is unlikely to trigger more aggressive RBA easing until consumer spending and broader economic activity signal a sharper slowdown.

These key scenarios could dictate if the AUD/USD pair holds above $0.66.

AUD/USD: Key Scenarios to Watch

• Bearish AUD/USD Scenario: Weak Aussie data or dovish RBA chatter may push AUD/USD toward $0.66.
• Bullish AUD/USD Scenario: Strong Aussie labor market data or hawkish RBA cues could drive AUD/USD toward $0.67.

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

Michigan Consumer Sentiment to Shift AUD/USD Rate Differentials

While economists are betting on a November RBA rate cut, traders expect a more dovish Fed policy stance in the fourth quarter.

Weaker consumer sentiment may fuel speculation about aggressive Fed cuts in Q4. A more dovish Fed rate path would narrow the US-Aussie interest rate differential further, favoring the Aussie dollar. Under this scenario, the AUD/USD pair may climb toward $0.67.

Conversely, improving sentiment may temper bets on Q4 Fed rate cuts. A less dovish Fed rate path may widen the rate differential, pushing AUD/USD toward $0.66.

Key Market Drivers to Watch Today:

• USD/JPY: BoJ chatter, Japanese politics, and Japanese economic data.
• USD/JPY and AUD/USD: Michigan Consumer Sentiment.
• AUD/USD: Upcoming Aussie economic data and RBA policy 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.