Continues to Threaten the Yen with a Big B

Meanwhile, Japan will have to do everything it can to keep its interest rates low, which will continue to weaken the yen. 

• The USD/JPY has rallied during Thursday’s trading session as the market closely monitors the ¥135 level.
• In recent days, the 10-year yield in Japan has tested the crucial 50 basis points level, indicating that the Japanese yen will continue to struggle.
• The Bank of Japan will do everything in its power to keep interest rates below this level, causing the market to react directly to the rate movement. If interest rates remain high, the Bank of Japan will have to continue printing Japanese yen, thereby flooding the market with currency.

As central banks around the world appear to be tightening monetary policy, bonds start to offer more attractive yields that Japan does not offer. Consequently, the Bank of Japan will have to do everything it can to support its bond market, as nobody wants to buy the paper. The Bank of Japan owns most bonds, leaving Japan essentially stuck. They can either have low yields and an extremely weak currency or a reasonably strengthened currency, but they must allow yields to rise. Japan is one of the most indebted countries in the world, making it a bug looking for a windshield.

The United States is experiencing a significant inflation problem, and the Federal Reserve is nowhere near loosening its monetary policy. Therefore, it is highly probable that the USD/JPY pair will continue to experience significant upward momentum over the longer term. Although the timing is uncertain, it appears that significant pressure is building, which will eventually have to be released. Breaking above the short-term resistance just above could lead to a move toward the ¥137.50 level, while the 200-Day EMA offers substantial support underneath, as well as the 50-Day EMA.

In conclusion, the US dollar is likely to continue its upward momentum in the USD/JPY pair, as central banks around the world are tightening monetary policy. Meanwhile, Japan will have to do everything it can to keep its interest rates low, which will continue to weaken the yen. The Bank of Japan will need to support its bond market as nobody wants to buy Japanese paper, leaving the country stuck between a rock and a hard place. As inflation remains a major problem in the United States, the Federal Reserve will not loosen its monetary policy, indicating that the USD/JPY pair will continue to see upward momentum over the longer term.