Yesterday's night was challenging for the USD/JPY pair. The dollar bulls pushed the quote to the levels that were last seen in September when Japanese monetary authorities had to intervene in the market.
The greenback opened this week with a rally, having strengthened against all majors, including the yen. USD was supported by several factors.
Traders fled to this safe-haven asset amid another round of tensions between Russia and Ukraine and growing fears over the global recession.
Yet, the biggest driver for the dollar remains the hawkish stance of the US Federal Reserve.
Strong US jobs data released on Friday left no doubts that the Fed won't abandon its plan to fight inflation.
According to estimates, the probability that the Fed will raise the rate by another 75 basis points stands at 92%. Expectations may get higher as key reports are published this week.
On Wednesday, markets expect the release of the FOMC minutes for September. Analysts at TD Securities predict that the minutes will have a more hawkish tone given persistent inflation in the US.
Fresh CPI data in the US is due to be out on Thursday. Economists at TD Securities expect the inflation rate for September to slightly decrease to 8.2% from 8.3%.
If the consumer price index shows slight changes or no changes at all, this may force the Fed to take even more aggressive steps.
Such a scenario can be a strong driver for the US Treasury yields. On Monday, the US bond yield approached a critical level of 4.00%, which boosted the dollar's rise.
Yesterday, the US dollar index hit a 20-year high of 113. The USD/JPY pair was especially volatile.
In the early trade on Tuesday, the dollar/yen pair tested the level of 145.80 which is just 10 pips below the red line.
When USD/JPY hit the 24-year low of 145.90 three weeks ago, Japan made an intervention to support the national currency for the first time since 1998.
As the pair bulls have again asserted their strength, the Japanese monetary authorities have no other choice but to prepare for another intervention.
On Tuesday morning, Japan's top currency diplomat Masato Kanda said authorities were always ready to take necessary steps against excessive currency volatility.
Meanwhile, Japan's Finance Minister Shunichi Suzuki said he was going to discuss the recent intervention at the upcoming G20 meeting. The minister also noted that the United States showed understanding to "a certain extent" of Tokyo's currency market intervention.
However, speculations about new interventions from the BoJ managed to cool down the dollar/yen's rally only for a while.
Later on, traders got another hint from the Japanese government that spurred a new cycle of activity.
Thus, Japanese Prime Minister Fumio Kishida said the central bank needed to maintain its ultra-loose monetary policy until wages rose.
The market was also shocked by his comment about Kuroda's 10-year tenure as the BoJ Governor.
The Prime Minister noted that he was not thinking of shortening his term and didn't expect Kuroda to leave office in April 2023.
This statement delivered a hard blow to the yen. Markets hoped that the central bank would change its policy and the yen would recover when Kuroda left office.
Now the majority of analysts predict a long downtrend for the yen. The downward dynamic may persist until the Fed and other central banks start to wind down their tightening policy.
The increasing divergence in monetary policies of the hawkish US Fed and the dovish BoJ means that the yen risks hitting new record lows against the dollar even if the Ministry of Finance steps in once again to support the currency, analysts at Wells Fargo warn.
According to Wells Fargo, the Japanese currency may ease to 149 against the US dollar by the first quarter of 2023.
