Not so long ago USD/JPY was near death. But at the end of last week, the major recovered and started to impress. Now most analysts see its potential for further growth.

The dollar has the wind at its back

Last year, USD/JPY was the best major pair as the monetary paths of the Federal Reserve and Bank of Japan diverged significantly. The former took a hawkish route, while the latter stayed dovish.

The balance of forces only changed at the end of last year, when there were fears in the market that the gap in interest rates between the US and Japan would begin to shrink.

Speculation on this topic did not emerge out of nothing: In December, the Fed slowed the pace of rate hikes, and the BOJ adjusted its yield curve control policy for the first time in many years, which was interpreted by the market as a hawkish move.

Against this backdrop, the dollar fell noticeably against its Japanese counterpart. But over the last few days, the greenback felt the rush of strength again.

Since the end of last week, the pair has been demonstrating growth. On Friday, the quote jumped by almost 2%, and yesterday it strengthened by more than 1%.

The catalyst was conformity formed in the market. In the light of the latest news, investors have reconsidered their views on the Fed and BOJ's policies.

Now most market participants are inclined to believe that in the near future, the monetary divergence between the US and Japan will continue to grow.

After last week's strong U.S. employment report, traders increased bets that the Fed will raise rates at least twice more this year.

"Friday's NFP (nonfarm payroll) number solidified the likelihood of another 25 basis points hike and reduced the chances of an eventual rate cut at the end of the year, sending equities lower and the greenback soaring," said John Doyle, vice president of operations and trading at Monex USA.

At this stage, investors expect the index to reach a high of 5.1% by July, which is higher than their previous estimate of less than 5%.

The strengthening of hawkish market expectations contributed to a broad-based uptrend in the U.S. currency. On Monday, the dollar index soared to a nearly one-month high of 103.76.

The yen took a punch

The dollar has been hit on many fronts in the last two sessions, but it showed the best values, like in the good old days, against the Japanese currency.

At the start of the week, the yen fell on the back of a report that BOJ Deputy Governor Masayoshi Amamiya was being sounded out to be the next governor.

Recall that current BOJ Governor Haruhiko Kuroda's term of office is set to end in April. Presumably this week the national government should name his successor.

Several candidates are running for the position, including politicians who have previously voiced a hawkish course.

Yen bulls have high hopes for them, but it seems that these dreams are not destined to come true. Yesterday, Japan's Nikkei reported that the Japanese government has approached Amamiya for the role. He has a reputation as Kuroda's right-hand man and is considered the most dovish among the contenders.

Members of the government denied the information, but it could not save the Japanese currency from falling. On Monday, JPY fell to a one-month low of 132.90.

Given Japan's long-standing commitment to an ultra-loose course, many market participants now estimate that Amamiya's dovish course is the most plausible scenario.

At the same time, most analysts are confident that this official, once at the helm, will take the path of least resistance - maintaining the policies initiated by his predecessor.

"I don't think the BOJ will reverse monetary policy," said Tina Teng, market analyst at CMC Markets. "There are still economic concerns, there are still recessionary risks."

Many experts think that Amamiya's nomination as the head of BOJ will lead to further weakening of the Japanese currency against the dollar.

However, if the government nominates another name it might give a strong impulse to the yen, and then the USD/JPY is likely to drop below the key level of 130.

USD/JPY now

Today, the focus is on the Japanese wage growth data.

Previously, the BOJ has repeatedly stressed that a high figure accompanied by solid inflation is a crucial condition for the country to roll back accommodative policies.

Statistics released this morning showed that real wages in Japan rose an annualized 0.1% in December. This is the first increase in nine months.

Meanwhile, nominal wages also showed a positive trend, rising 4.8% year-over-year. This is the fastest increase in 26 years.

The yen appreciated slightly against the dollar on positive data. At the time of writing, the pair was down 0.4% to 132.11.

The Japanese currency was also supported by Japanese Finance Minister Shunichi Suzuki's statements in the morning. The official confirmed that last year, the Japanese government intervened in the foreign exchange market to support the yen.

These were interventions on October 21 and 24, which have yet to be confirmed. The Japanese government spent 5.6 trillion yen ($42.2 billion) and 729.6 billion yen on the respective days to prop up the yen, which hit a 32-year low against the dollar.

So last year, Japan had a total of three interventions. The fact that the authorities decided to talk about the two of them now that the yen is in free-fall again is hardly a coincidence, and traders, of course, better keep their eyes open.

But let's get emotion out of the way and think logically: is renewed talk of intervention really going to support the yen at this point? Probably not.

The Japanese authorities spent a long time threatening speculators with intervention and decided to take this measure only when JPY crossed the so-called red line, which was above 150. Right now the yen is trading around 132, which is way below the critical level.

The Japanese currency is still far from reaching the bottom but it looks like it will continue to fall in the coming days. In particular, the yen might be pressured today by the speech of Fed Chairman Jerome Powell.

Traders expect Powell to shed light on the further trajectory of interest rate hikes in the US. At the same time, most market participants are inclined to believe that the Fed will remain hawkish. If Powell does not disappoint investors, the dollar will get another strong boost to the upside.