Executive Summary
AUD/JPY trades at ¥112.80 as of 11 March 2026, having surged from the October 2025 trough near ¥86 — a rally of approximately 31% — driven by a remarkable bilateral narrative reversal: the RBA became the first G10 central bank to hike from a cutting cycle (3.85%), while the BoJ cautiously normalises from its negative-rate era at just 0.75%. The pair has appreciated roughly +8% year-to-date and reached a fresh 36-year high on 25 February 2026 after Australia announced stronger-than-expected headline inflation, demonstrating the power of the RBA-BoJ policy divergence story. Yet the pair now sits at a critical juncture: the Iran conflict's asymmetric impact — oil above $87/bbl is mildly supportive for AUD but substantially negative for JPY via energy import costs — has temporarily widened the pair beyond what bilateral rate differentials alone justify. The dominant bilateral narrative is a tug-of-war between AUD's exceptional carry advantage (+310bps annualised) and JPY's growing safe-haven premium plus incipient BoJ normalisation trajectory.
AUD/JPY is highly sensitive to three factors — the interest-rate differential, global risk appetite, and inflation trends in both countries — and the pair trends when these factors align but becomes volatile when they diverge
. Our headline tactical stance is Neutral (Conviction 2/5): the carry story is powerful but AUD positioning at the 100th CFTC percentile, elevated VIX, and approaching BoJ catalysts (Shunto, April hike) create near-term two-way risk. Strategically we are Mildly Bearish (Conviction 3/5) on a 1–6 month view as BoJ rate convergence, the AUD PPP overvaluation versus JPY of +23.8%, fiscal year-end repatriation, and the structural carry unwind argument combine to favour a gradual pair decline toward 105–108.