Australian Dollar treads water against Japanese Yen ahead of BoJ rate hike

• AUD/JPY trades around 110.55 on Wednesday, virtually unchanged on the day.
• Markets expect the Bank of Japan to raise interest rates by 25 basis points on Friday.
• Expectations of further rate hikes in Australia provide some support to the Australian Dollar.

AUD/JPY trades around 110.55 on Wednesday at the time of writing, virtually unchanged on the day. The cross remains caught between expectations of monetary policy tightening in Japan and Australia, while rising energy prices put additional pressure on the Japanese economy, which relies heavily on imports.

The Bank of Japan (BoJ) takes center stage ahead of its monetary policy decision on Friday. Markets now appear to have fully priced in a 25-basis-point (bps) rate hike, which would lift the policy rate to 1.25% from the current 1%. Such a move would bring borrowing costs in Japan to their highest level since April 1995.

Investors' attention will therefore mainly focus on guidance from BoJ Governor Kazuo Ueda regarding the path of interest rates beyond the September meeting. Traders are also considering the possibility of another rate increase in December. Comments pointing to a continuation of the tightening cycle could support the Japanese Yen (JPY) and limit AUD/JPY's attempts to move higher.

The Japanese Yen, however, continues to face a headwind from rising energy prices linked to the ongoing conflict in the Middle East. Japan relies heavily on energy imports, meaning that a sustained increase in Oil prices raises the country's import bill and could weigh on its trade balance.

On the Australian side, monetary policy expectations also provide support to the Australian Dollar (AUD). The Reserve Bank of Australia (RBA) kept its Official Cash Rate (OCR) at 4.35% at the last three meetings, following three consecutive increases earlier this year, but persistent inflationary pressures are fueling expectations of further tightening.

According to the RBA Rate Tracker, markets assign nearly a 78% chance that the OCR will be raised to 4.6% at the Australian central bank's next meeting. These expectations could help limit downside pressure on AUD/JPY, although the cross's near-term direction is likely to remain highly dependent on the message delivered by the BoJ on Friday.