12.03.202413:18 Forex Analysis & Reviews: USD/JPY: yen falls into familiar trap

The USD/JPY pair sharply turned down last week after two weeks of the range-bound market. For two weeks, traders quietly traded at the levels slightly above 150. Downward pullbacks were replaced by bullish impulses - the price moved in a circle steadily. But on March 5, USD/JPY sellers took power into their own hands. Just in a few days, they pulled the price down by 400 pips. Today we are watching a correction, but it is too early to talk about the resumption of the bullish movement. Such predictions are even dangerous: after all, if the consumer price index, which will be published in the US in the early American session, is not on the side of the greenback, the sellers may again seize the initiative.

Importantly, such a sharp bearish reversal was caused not only due to the weakening of the US dollar, but by the strengthening of the Japanese currency. The market is again talking about the fact that the Bank of Japan may raise interest rates at its March meeting, or at least announce this step in the context of the next meeting in April.

Let me remind you that such rumors were actively circulating in the market at the end of last year. As a result, USD/JPY plunged by more than a thousand pips. The newsmaker was not just anyone, but Bank of Japan's Governor Kazuo Ueda. He told the Japanese Parliament that the central bank was considering various options for target interest rates after it exits the negative rate policy. He noted that the regulator could either maintain the interest rate applied to reserves or return to a policy focused on the overnight rate. At the same time, Kazuo Ueda did not specify exactly when the regulator was going to change its settings. However, traders made their own conclusions. In essence, the market expected the regulator to begin to normalize monetary policy at the next meetings in December or January.

But as we got closer to the December meeting, skepticism about the central bank's hawkish intentions grew in the market. Indeed, neither in December nor in January, the Bank of Japan made any decisions, but at the same time voiced very dovish messages. In particular, Ueda said that the Bank of Japan will consider exiting ultra-loose policy only when it is confident that the inflation target will be achieved. The central bank is also focusing on negotiations between trade unions and employers regarding wage increases. At the same time, Ueda warned that financial conditions will remain "very soft" in any case, even if the regulator abandons the policy of negative interest rates.

The Bank of Japan Governor still maintains this position. Despite everything, rumors began to circulate in March again that in the foreseeable future the central bank would nevertheless venture into policy normalization.

I believe that the yen is again being caught in the same trap as it happened at the end of 2023.

So, speaking in the national parliament today, Ueda repeated his message that the central bank continues to focus on the wage-inflation cycle. According to him, the regulator will look for a way out of the policy of negative rates, yield-curve control, and other large-scale easing measures only when inflation of 2% is "stably and sustainably achieved."

The nearest meeting of the Bank of Japan will take place exactly in a week – on the 19th of March. In the context of today's statements by the BoJ's Governor, it can be assumed that the central bank will not make any decisions on normalizing monetary policy. Curiously, the regulator will probably not announce a change in policy due to the incomplete fundamental picture. The results of the annual negotiations on wages between business and trade unions will be known in April.

If the Bank of Japan does not voice clear signals (which is very likely), the yen will again come under selling pressure. In addition, here it is necessary to recall the words of Japan's Finance Minister Shunichi Suzuki, who recently stated that the country "is not at the stage where deflation could be declared overcome."

Thus, traders have too high hopes for the Japanese currency. If the Bank of Japan does not live up to the expectations placed on it, that is, does not take a hawkish stance following the results of the March meeting, the yen will again be under attack. In my opinion, this is the most realistic scenario. In this case, USD/JPY bears will only be able to count on the greenback. USD/JPY could go down only due to the weakening of the dollar, which in turn will react to inflation reports (consumer price index today and producer price index on Thursday) and comments from Fed policymakers.

If inflation in the US turns out to be on the side of the American currency, then, in my opinion, it would be advisable to plan long positions for USD/JPY, even despite the market's hawkish expectations regarding the actions/statements by the Bank of Japan at the March meeting. The nearest (and so far only) target for the upward movement is 148.70. At this level, the Kijun-sen and Tenkan-sen lines coincide in the D1 timeframe.