The Bank of Japan's policy meeting on Friday is the highlight of the week in Asia, after Governor Kazuo Ueda stoked speculation of an imminent move away from ultra-loose policy.
Carol Kong, economist and currency strategist at Commonwealth Bank of Australia, said she expects the yen to be volatile leading up to the policy meeting. "In terms of the direction of travel, USDJPY can definitely track higher," Kong said.
Investors may have potentially misinterpreted Ueda's comments. And the recent spell of weakness in Japanese wages and possibility prices too could soften and push the BOJ farther from its inflation goal, the case for a BOJ policy tightening is still not very strong.
"This means USDJPY could rise, especially if Governor Ueda behaves amicably and dashes hopes of policy tightening at the upcoming meeting", said experts at the Commonwealth Bank of Australia.
Most investors expect divergences in economic growth and in yields will keep the dollar propped up, particularly against the yen.
U.S. Treasury yields have been edging higher, with the two-year above the 5% threshold and up 25 bps this month, spurred by rising government spending and the anticipation of the Fed keeping rates high for longer periods to rein in inflation that's still above target. Last week's U.S. retail sales data played a part, reducing the odds of recession even further.
Futures are pricing in just a 3% chance that the Fed raises interest rates at the end of its two-day meeting next Wednesday.
"With growth still strong and still tentative evidence the labor market and inflation are normalizing, officials are unlikely to be willing to send a signal that they are done raising rates," analysts at Deutsche Bank Research wrote.
The stark contrast between a dovish BOJ and U.S. Fed funds rate at 5.38% supports a weak yen. Most market participants probably regard the rise in USDJPY since April as in line with fundamentals.
Given the above statements, the probability of further strengthening of the USDJPY currency pair is still high.
Overall Recommendation is, as before, to buy USDJPY and hold this position until the end of the year, followed by profit or loss taking.