The dollar-yen pair fell almost 300 points yesterday, reacting to the U.S. inflation report. The data came out in the red zone, disappointing the dollar bulls. The U.S. dollar index fell to a six-month low, to the bottom of the 103rd figure. USD/JPY, in turn, updated only a weekly low, denoting itself at 134.69. After that, the downward impulse faded, and during the Asian session on Wednesday, the pair even regained some of the lost positions, returning to the area of the 135th figure. Traders do not risk developing the downward direction in anticipation of today's events: the Federal Reserve will announce the results of its meeting at the end of the trading day.

Notably, the main driver of the December USD/JPY decline was not the dollar, but the yen, which strengthened due to the unexpected hawkish statements of some representatives of the Bank of Japan. In comparison, yesterday's inflation report, which is crucial for all dollar pairs, triggered a 300-point drop. While signals from Japanese regulators let the bears of USD/JPY make a 600-point advance from 139.92 (Nov 30) to a 4-month low of 133.66 (Dec 2).

Recall that at the beginning of this month, traders heard hawkish messages from the Bank of Japan for the first time in a long time. BOJ board member Asahi Noguchi stated that the central bank is ready to partially revise its soft monetary policy if inflation indicators turn out to be "too high." He called this step a "preventive measure" to curb inflationary growth. A little later, the head of the Japanese regulator Haruhiko Kuroda indirectly confirmed the existence of such intentions. He said that the central bank is really considering an exit from the ultra-soft monetary policy "as soon as the central bank reaches its inflation target of two percent on a sustainable basis." At the same time, he added that if the price target is reached, the bank's management will discuss the fate of assets in ETF's "as part of a strategy to exit the ultra-soft policy."

Previously, Kuroda had only allowed easing the parameters of monetary policy if such a need arises. He repeated this mantra with such persistence and for so long that traders, for the most part, were no longer reacting to these dovish messages. Moreover, there is a strong opinion in the market that major changes of a hawkish nature are a priori possible only after the current governor of the Bank of Japan leaves his post (his second term in office expires in April 2023, re-election is impossible).

That is why the USD/JPY traders reacted so strongly to the latest statements by Noguchi and Kuroda. Moreover, these official statements are overgrown with relevant rumors. In particular, according to Reuters, the Bank of Japan may abandon the yield cap on 10-year Japanese government bond (JGB) next year as Japan enters an era of high inflation. According to news agency sources, the Japanese regulator "begins to worry about the possibility of inflation accelerating more than expected."

However, not all of Kuroda's colleagues agree that the Bank of Japan needs to adjust its policy. For example, board member Toyoaki Nakamura recently said that the country's economy is still recovering from the recession caused by the COVID pandemic, so the central bank should patiently continue easing monetary policy. At the same time, inflation dynamics are not worrying Nakamura. According to him, consumer inflation in Japan is accelerating, "but next year its growth rate is likely to slow down, as the stimulus from rising energy and food prices is already weakening."

It is also worth noting that yesterday representatives of the Japan Bankers Association reported that the country's banks could suffer losses on their government bonds in the amount of more than $1 trillion if the Bank of Japan loosens its control over the yield of 10-year bonds. Commenting on this information, Bloomberg sources in the Japanese government said that the financial regulator is now studying how vulnerable creditors will be to a sudden fall in government bonds if the central bank still abandons the ultra-soft monetary policy.

In other words, the discussion about leaving the ultra-soft monetary policy is still ongoing, but even the very fact of this discussion provides background support for the yen.

Of course, in the short term, the USD/JPY pair will focus only on American events, reacting to the results of the December Fed meeting. But at the same time, it is worth recognizing that the Japanese currency now has "its own" fundamental arguments that can strengthen the bearish mood for the pair (earlier, the downward impulses of USD/JPY were mainly due to the weakening of the greenback). Therefore, if the Fed does not support the dollar today, the pair's downward trend may develop in the medium term.

From a technical point of view, the USD/JPY pair on the daily chart is located between the middle and lower lines of the Bollinger Bands indicator, and is under all the lines of the Ichimoku indicator, signaling the priority of short positions. The main target of the downward movement is 133.90, which corresponds to the lower line of the Bollinger Bands on the D1 timeframe.