USD/JPY recovers most of its losses as risk appetite improves further; BOJ policy chatter increases

In the Tokyo session, the USD/JPY pair has recovered nearly all of its morning losses and is trading near 149.00. Earlier, the asset dropped to around 145.48 as the US dollar index (DXY) became highly volatile. The DXY fluctuated wildly between 111.46 and 112.26.

After a strong Friday, S&P500 futures have risen even further, indicating that market sentiment is exceptionally bullish. The 10-Year US Treasury rate has decreased to 4.21 percent. The returns on 10-year US Treasury yields reached a 14-year high of approximately 4.34 percent last week.

According to Reuters, the second consecutive knee-jerk reaction in the USD/JPY pair is indicative of a possible intervention by the Bank of Japan (BOJ) in the FX market.

According to analysts at the National Australia Bank (NAB) in Sydney, "It's glaringly evident that the BOJ is interfering."

In early Asia, Japan's chief currency diplomat, Masato, declared that the administration is prepared to take action 24 hours a day, seven days a week to defend the yen against speculative moves on the currency market. Japanese officials refused to comment on their interference in foreign exchange markets, but they pledged to take measures against disruptive market movements.

Wednesday's interest rate decision by the Bank of Japan (BOJ) will be of paramount importance going ahead. Weak economic fundamentals resulting from shocks to external demand will compel the BOJ to maintain its dovish stance towards interest rates. Governor of the Bank of Japan Haruhiko Kuroda misspoke last week when he stated that Japan's economy is sensitive to external demand shocks, which might tip it back into deflation. This demonstrates that the issue of policy tightening has never been considered.