Australian Dollar Hits Multi-Year High Against JPY: What’s Driving the Rally and Who Benefits?

Australian dollar jumps against the yen as rate gaps widen

The Australian dollar has been on a tear against the Japanese yen, with AUD/JPY now testing the 108 level, its strongest in years. For Australian investors, this isn’t just a number on a screen. It reflects a widening gap between how Australia and Japan are managing their economies, and that gap looks set to grow when the Reserve Bank of Australia meets on February 3.

The key question is whether this strength can continue and who stands to benefit.

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Why the Australian Dollar Keeps Climbing

The biggest driver behind the Aussie dollar’s strength is the stark difference in interest rates between Australia and Japan.

Australia’s cash rate sits at 3.60%, and all four major banks now expect the RBA to raise rates by 0.25% to 3.85% at its February meeting. This follows stubborn inflation readings, with trimmed mean inflation at 3.3% and headline CPI jumping to 3.8%, both well above the RBA’s 2-3% target. The implication is clear: the RBA needs to act, and higher rates should continue supporting the Australian dollar.

Japan tells a different story. The Bank of Japan’s policy rate is just 0.75%, and when you account for inflation, Japanese savers are actually losing money by holding yen. This creates a powerful incentive for capital to flow towards higher-yielding currencies like the Australian dollar.

The “carry trade”, borrowing in low-rate currencies to invest in higher-rate ones, continues to favour the AUD. Japanese investors poured nearly ¥9.4 trillion (around US$60 billion) into overseas assets in 2025, adding constant selling pressure on the yen.

Japan’s Fiscal Concerns Add to Yen Weakness

Beyond interest rates, Japan faces growing concerns about government spending, and political uncertainty is adding to the pressure.

Prime Minister Sanae Takaichi dissolved the Diet on January 23 and called a snap election for February 8, hoping to capitalise on her 70% approval ratings. But her record US$783 billion budget proposal and “proactive fiscal” stance have rattled investors worried about Japan’s long-term debt burden.

Japanese government bond yields have jumped to multi-decade highs as investors demand more compensation for holding Japanese debt. The yen has fallen roughly 4.6% since Takaichi took office in October, and weakness against the Australian dollar has been even sharper.

Who Benefits From a Strong Australian Dollar?

Travellers to Japan are the clear winners. The favourable exchange rate means significantly more yen for every Australian dollar, making flights, hotels, and shopping noticeably cheaper.

Retailers selling imported goods also benefit. Companies like Harvey Norman and JB Hi-Fi see lower costs when the Australian dollar is strong.

Investors with Japanese exposure face a mixed picture. A strong AUD reduces the value of unhedged Japanese investments when converted back to dollars.

Exporters to Japan may struggle, as Australian goods become relatively more expensive for Japanese buyers.

The Investor’s Takeaway

The structural factors driving AUD strength remain in place: higher Australian rates, Japan’s fiscal uncertainties, and persistent carry trade demand all point in the same direction. Several forecasters see AUD/JPY potentially reaching 120 or higher by year-end.

However, investors should watch two key risks. If Japan’s central bank signals faster rate hikes, the yen could bounce sharply. Japanese authorities have also warned about “speculative” currency movements; intervention remains possible if weakness accelerates.

For now, the Australian dollar appears well-supported against the yen. The RBA’s February 3 decision will be the next major catalyst to watch.