160.00: Japanese Yen decline stalls a few pips short as intervention risks rise

• 159.80 marks a pause for USD/JPY on Thursday. The pair gained about 1.25% over the preceding two days.
• The US Dollar has strengthened broadly as speculation builds over another Fed interest rate increase in December.
• Strong Japanese producer inflation data have been counterbalanced by dovish remarks from the BoJ's Asada.

A nearly 1.25% decline over the past two days has left the Japanese Yen (JPY) virtually unchanged against the US Dollar (USD) on Thursday. Widening policy divergence between the Federal Reserve (Fed) and the Bank of Japan (BoJ) drove the sell-off. USD/JPY has since paused near 159.80, with 160.00 regarded as a key threshold for the Tokyo authorities.

Strong US consumer inflation figures earlier this week, followed by a series of hawkish Fed statements advocating another interest rate increase in December, have prompted investors to expand their US Dollar long positions. 

Further Fed tightening following the US central bank's 9 December meeting is fully priced into futures markets. CME’s FedWatch Tool puts the probability of a half-point increase at nearly 10%. A large number of Fed officials are scheduled to speak later on Thursday, offering a clearer view of the bank's near-term policy intentions.

December rate hike expectations fade after dovish BoJ remarks

Japan presents a stark contrast. BoJ policymaker Toichiro Asada, one of the two dovish dissenters at the September meeting, cautioned that higher borrowing costs might undermine growth and underlying inflation. His remarks have challenged market expectations for another rate increase at the next meeting on 17 December, putting additional pressure on the Japanese Yen.

Earlier Japanese data offered support, giving BoJ hawks further grounds to argue their case. Annual growth in the Producer Price Index (PPI) accelerated to 7.1% in October, above the expected 6.5% and September's 6.8% increase.

MUFG analysts nevertheless identify support for the Yen in “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 MUFG experts assess that “the risks certainly look more skewed to Yen strength over the medium term.”