A bad example is contagious. In November–December, investors were eagerly buying the yen as a hot commodity in anticipation of a divergence in monetary policy between the Federal Reserve and the Bank of Japan. From Washington, a decrease in the federal funds rate from 5.5% to 4% was expected, and from Tokyo—a normalization of monetary policy. However, it is unlikely to proceed as quickly as in other developed countries in 2022–2023. Speed matters. As soon as the market realized this, the path upwards for USD/JPY was open.

On Forex, there is a strengthening belief that even if the Bank of Japan abandons control over the yield curve of bonds or raises the overnight rate, the yield of 10-year securities is unlikely to soar significantly above 1%. Bank of Japan Governor Kazuo Ueda and his colleagues intend to move at a snail's pace on the road to normalization of monetary policy. Especially since the future of inflation is shrouded in darkness. Following the slowdown in consumer prices in Tokyo from 2.3% to 2.1%, the December producer price index marked a zero increase over the year. This is the first such value of the indicator since February 2021.

Inflation Dynamics in Japan

As a result, the pace of growth of the national consumer price index risks falling, and the Bank of Japan will be pondering whether to interpret this dynamic as a reason to abandon normalization. Lately, the BoJ has been overly focused on wages, which, in its opinion, could jump to 4% following employer-employee negotiations in the spring. This would be the most significant rise in the indicator since 1992. Given its positive correlation with inflation, Kazuo Ueda and his colleagues will have compelling arguments to abandon negative rate policies.

In any case, the Bank of Japan intends to crawl along the path of normalization. Against the backdrop of the Federal Reserve and the ECB, which are not in a hurry, this allows the bears in USD/JPY to take profits on shorts and leads to a rise in the pair's quotes. For instance, the head of the Bank of Austria, Robert Holzmann, stated that an increase in the deposit rate is not guaranteed in 2024, and the majority of officials from the Governing Council, led by the head of the Bundesbank, Joachim Nagel, insist that monetary expansion should not be discussed until June.

Investors are beginning to understand that the divergence in monetary policy between the Federal Reserve and the Bank of Japan may not be as serious as anticipated at the end of 2024. This circumstance inspires the bulls in USD/JPY to attack. The potential for a rally looks untapped, also due to the fact that the yen is losing its status as a safe-haven asset. Previously, it reacted sharply to natural disasters with growth, but the recent earthquake on the Noto Peninsula, on the contrary, weakened it.

Technically, on the daily chart of USD/JPY, the upward movement continues, arising thanks to the 'Three Indians' pattern. The breakout and consolidation above the moving averages indicate the seriousness of the bulls' intentions. Longs formed from 142.2 and increased at resistance breakouts at 144.35 and 144.9 should be held and periodically increased on pullbacks.