AUD/JPY retreats from 109.00 as "rate check" by Japan's Finance Ministry lifts JPY

• AUD/JPY retreats sharply as intervention fears boost the JPY, though it lacks follow-through.

• Domestic political uncertainty and fiscal concerns continue to act as a headwind for the JPY.

• The hawkish BoJ  outlook fails to impress the JPY bulls, while RBA rate cut bets benefit the AUD.

The AUD/JPY cross retreats nearly 130 pips from the highest level since July 2024, around the 109.00 mark touched earlier this Friday, though the pullback lacks follow-through. Spot prices quickly reversed an early European session fall and currently trade around the 108.30 region, nearly unchanged for the day.

The Japanese Yen (JPY) surges across the board in reaction to the "rate check" call from Japan’s Ministry of Finance, suggesting that authorities may be preparing to intervene in the currency market. This turns out to be a key factor that prompted traders to take some profits off the table, especially after the AUD/JPY pair's sharp rise of around 375 pips this week.

However, domestic political uncertainty and fiscal concerns hold back the JPY bulls from placing aggressive bets. Japan's first woman premier, Sanae Takaichi, dissolved parliament ahead of a snap election on February 8. A strong majority for the ruling Liberal Democratic Party (LDP) in the lower house would give her freedom to pursue fiscally expansionary policies.

Meanwhile, investors gave a thumbs down to Takaichi’s proposal to cut the 8% food consumption tax for two years, which led to a free fall in government bonds. This, in turn, overshadows the Bank of Japan's (BoJ) hawkish outlook and keeps a lid on the JPY, which, in turn, offers some support to the AUD/JPY cross and helps limit any meaningful depreciating move.

As was widely anticipated, the BoJ decided to leave short term rate on hold, while raising its growth and inflation forecasts for the fiscal year 2026. In the post-meeting press conference, BoJ Governor Kazuo Ueda noted that the underlying inflation will keep rising moderately and reiterated that the central bank will keep raising rates if the economic outlook is realized.

The Australian Dollar (AUD), on the other hand, continues with its relative outperformance on the back of rising bets for an interest rate hike by the Reserve Bank of Australia (RBA) next month, bolstered by Thursday's stunning jobs report. This, in turn, warrants some caution before confirming that the AUD/JPY cross has topped out and placing bearish bets.