• USD/JPY hit fresh multi-decade highs near 134.50 but has since backed off towards 134.00.
• But the pair is still over 1.0% higher on the day with BoJ dovishness and rising global yields in focus.
• The pair is now up around 4.5% on the month and over 6.0% since late May lows in the 126s.

USD/JPY extended on its Asia Pacific/early European session gains in the lead up to the US open, printing fresh multi-decade highs just below 134.50 in the process. Analysts have been citing the BoJ’s persistently dovish stance relative to its increasingly hawkish G10 peers, with the ECB the latest major bank to shift in recent weeks towards signaling a series of rate hikes, as weighing on the yen on Wednesday, as well as upside in global yields.

The BoJ’s policy of capping 10-year Japanese yields at no more than 25 bps above zero means that the yen is sensitive to rate differentials, hence, Wednesday’s bounce in US 10-year yields back above 3.0% is lifting USD/JPY. However, since the US open, the pair has fallen back slightly to just above the 134 level, where it continues to hold onto gains of around 1.2% on the day.

That takes the pair’s gains on the week to over 2.5%, since the start of the month to nearly 4.5% and since last month’s sub-126.50 lows printed on 24 May to the north of 6.0%. Many traders will be skeptical as to how much further the latest rally has to run and will be feeling increasingly reluctant to keep chasing the pair higher.

If Friday’s US Consumer Price Inflation data shows an easing of US price pressures and results in some buck weakness as markets pare back on Fed tightening bets, profit-taking could see USD/JPY swiftly drop back to support in the low 131s. But so long as the BoJ refuses to budge from its ultra-dovish policy stance, the outlook for sustained yen strength isn’t great.

On Wednesday, the BoJ’s Governor pushed back against the idea that the central bank should do something about yen weakness. He told the Japanese parliament that FX policy was not the authority of the BoJ and said that a weaker yen would be positive for the economy, so long as moves lower are gradual.