Rising intervention risks halt Japanese Yen decline a few pips short of 160.00

• USD/JPY's advance pauses near 159.80 on Thursday, following gains of about 1.25% over the preceding two days.
• The US Dollar has strengthened broadly as speculation builds over another Fed rate increase in December.
• The impact of strong Japanese producer inflation data has been neutralised by dovish remarks from the BoJ's Asada.

Pressure from the widening policy divergence between the Federal Reserve (Fed) and the Bank of Japan (BoJ) has left the Japanese Yen (JPY) nursing a nearly 1.25% decline against the US Dollar (USD) over the previous two days. The Yen is largely unchanged on Thursday, with USD/JPY's advance pausing near 159.80. For Tokyo authorities, the 160.00 mark is regarded as a key milestone.

US Dollar long positions have increased as investors respond to strong US consumer inflation figures released earlier this week, alongside a series of hawkish remarks from Fed officials advocating another interest rate increase in December. 

According to the CME’s FedWatch Tool, futures markets fully price in additional Fed tightening following the US central bank's December 9 meeting, including a nearly 10% probability of a half-point rate increase. Numerous Fed officials are due to speak later on Thursday, offering greater clarity on the bank's near-term policy plans.

Do dovish BoJ remarks weaken the case for a December rate hike?

Japan presents a sharply contrasting policy outlook. BoJ policymaker Toichiro Asada, one of the two dovish dissenters at September's meeting, has warned that higher borrowing costs might hurt growth and underlying inflation. His remarks have put additional pressure on the Japanese Yen while calling into question market expectations for another rate increase at the next meeting on December 17.

Earlier Japanese data, however, offered support, with producer inflation strengthening the case for BoJ hawks. In the 12 months to October, the Producer Price Index (PPI) rose at an accelerated pace of 7.1%, exceeding the expected 6.5% and September's 6.8% increase.

MUFG analysts nevertheless point to support for the Yen from “signs that confidence in the JGB market has improved, no doubt helped by the more active BoJ and the general consensus that within one or two hikes, the BoJ would be at the neutral policy rate.” Against that backdrop, and with “intervention likely halting the prospects to the upside, and confidence in the BoJ improving,” the bank's experts conclude that “the risks certainly look more skewed to Yen strength over the medium term.”