USD/JPY stays mildly bid above 143.00 as Japan inflation, sluggish yields probe BOJ doves

USD/JPY struggles to defend 143.00, despite a recent pick-up during early Tuesday morning in Europe. In doing so, the yen pair portrays the market’s indecision ahead of the key monetary policy meeting decision from the US Federal Reserve (Fed) and the Bank of Japan (BOJ).

It’s worth noting that the eight-year high Japan inflation data, as per the National CPI YoY for August, joins the weaker yen to push the Bank of Japan (BOJ) towards monetary policy change even if the doves are tightly holding the reins. Strong yields on the Japanese Government Bonds (JGBs) also underpin hawkish bias for the BOJ.

Even so, Reuters said that the Bank of Japan is set to maintain ultra-low interest rates and its dovish policy guidance on Thursday, a decision that comes hours after its US counterpart's expected big rate hike and could trigger a fresh bout of yen selling. The BOJ preview also mentioned, “At a two-day policy meeting ending on Thursday, the BOJ is set to maintain its short-term rate target at -0.1% and that for 10-year government bond yields around 0%. Kuroda will hold a news conference after the meeting.”

Elsewhere, Japanese Finance Minister Shunichi Suzuki said on Tuesday that he “expects the Bank of Japan (BOJ) to guide policy appropriately taking prices and the economy into account.” On the same line were comments from the country’s Chief Cabinet Secretary Hirokazu Matsuno said that the “decision on reserve funds tries to mitigate the impact of price increases.”

Furthermore, Japan’s Ministry of Finance (MOF) stated earlier that the government will spend 3.48 trillion yen in budget reserves to cope with price hikes and covid-19.

Alternatively, downbeat US housing numbers and multi-day low of the US inflation expectations, as per the breakeven inflation rate of the St. Louis Federal Reserve (FRED), seem to challenge the US dollar buyers. However, economic fears emanating from China and Europe, as well as the return of the full markets, put a carpet under the US dollar.

Amid these plays, the S&P 500 Futures fade the previous day’s bounce off a two-month low around 3,920 whereas the US 10-year and 2-year Treasury yields remain sidelined at the highest levels since April 2011 and October 2007 in that order.

Moving on, USD/JPY traders will pay attention to the Fed versus BOJ divergence to determine the short-term directions of the pair. If the Fed chooses to talk down the further rate hikes and the BOJ sounds cautiously dovish, the odds of witnessing a pullback in prices can’t be ruled out.

Technical analysis

Despite the latest inaction, a sustained downside break of the 10-DMA, around 143.40 by the press time, joins multiple failures to cross the 145.00 hurdle to keep USD/JPY bears hopeful.