Australian Dollar inches higher against Japanese Yen following China’s inflation data

• AUD gains support as stronger Chinese consumer and producer price data fails to lift the currency.
• Japanese Yen strengthens following US Treasury warnings against shorting the currency and growing hawkish rate hike expectations.
• The Takaichi administration adopts a firmer policy stance to combat excessive Yen weakness ahead of the upcoming central bank meeting.

AUD/JPY pares its daily losses following the release of key economic data from China, Australia's primary trading partner. However, the currency cross remains in negative territory and is trading around 111.00 during Asian hours on Wednesday.

China's Consumer Price Index (CPI) climbed 0.8% year-over-year (YoY) in August, matching market consensus and accelerating from the 0.5% rise recorded in July. On a monthly basis, CPI inflation arrived at 0.4% in August, bouncing back from a 0.1% decline previously and coming in hotter than the expected 0.3% increase. Additionally, the Producer Price Index (PPI) jumped 3.8% YoY in August, following a 3.5% increase in July and beating the market consensus of 3.7%.

Furthermore, the AUD/JPY cross depreciated as the Japanese Yen (JPY) gained ground after US Treasury Secretary Scott Bessent warned traders against betting against the currency. The former hedge fund manager stated that he maintains a "pretty good insight" into the Bank of Japan's (BoJ) future actions and currency interventions.

Meanwhile, the BoJ is broadly expected to raise interest rates the following week. At the same time, the Takaichi administration has adopted a more hawkish stance as policymakers increasingly acknowledge the urgent need to limit excessive JPY weakness.

Analysts at UOB Group note that their latest 1–3 week view has shifted decisively more bearish after an “unexpectedly sharp move” in USD/JPY. They recall that as of Friday, with spot around 155.90, they had highlighted that “conditions are deeply oversold” following last Thursday’s sharp drop and that USD “must close below 155.00 before further declines are likely,” with “the next level to watch below 155.00” flagged at 154.20. However, they point out that yesterday the Dollar “broke below 155.00 and plunged to a low of 154.04,” price action that “suggests USD is likely to continue to weaken,” with the “year-to-date low of 152.08” now identified as the next key support. UOB adds that “the downside pressure will remain intact as long as USD holds below 156.00,” with that level now seen as strong resistance after being revised down from 157.50.